Ratio based failure prediction models for the Small-Medium Enterprises (SMEs) in the UK

Khanji, IMJ 2013, Ratio based failure prediction models for the Small-Medium Enterprises (SMEs) in the UK , PhD thesis, University of Salford.

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Abstract

Although SMEs represent over 99% of companies in the UK, there has been limited research into SME failure prediction modelling. This study develops failure prediction models specifically for liquidated SMEs using financial ratios. Despite the fact that there is a clear distinction between small sized (SEs) and medium sized (MEs) companies (in terms of assets, turnovers and employees size), the majority of studies developed models for SMEs as one group, but not as two different groups. In order to capture the predictive power of ratios in each group, there should be different prediction models for both sizes. The main question this study aims to answer: are there any differences between SEs and MEs predictive variables. To answer this question the study will 1) identify the financial variables for each group and examine their predictive power, 2) compare the classification accuracy of three different statistical techniques namely, Multiple Discriminant Analysis (MDA), Logistic Regression (LR), and Probabilistic Neural Network (PNN). And finally 3) testing reliability level and validation of the different ratio based prediction models. In order to include all categories of ratios, the data sample consists of 560 SMEs that disclosed full financial statements, and were liquidated in the period 2000-2007. The sample was divided into three groups; SEs, MEs and a combined SME group for size-specific predictions. A range of financial ratios were selected and examined, two sample procedures were tested to validate the results. Profitability is found to be the most important predictor for the SEs group, while liquidity is for the MEs. The overall accuracy of the three methods (MDA, LR, PNN) for each model is: SEs model (70%, 71%, 81%), MEs model (74%, 76%, 87%), and combined SME model (72%, 74%, 84%). For the first time, we reported size-specific financial ratio predictors for predicting SMEs failure. The results support our main question that there are differences between SEs and MEs predictive variables. Further studies are needed to explore the nature of these findings.

Item Type: Thesis (PhD)
Contributors: Liu, J (Supervisor)
Schools: Schools > Salford Business School
Depositing User: Institutional Repository
Date Deposited: 29 Jul 2021 13:32
Last Modified: 27 Aug 2021 21:56
URI: http://usir.salford.ac.uk/id/eprint/61348

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