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Predicting unlisted SMEs' default: Incorporating market information on accounting-based models for improved accuracy

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  • Andrikopoulos, Panagiotis
  • Khorasgani, Amir
Abstract
The risk associated with lending to small businesses has become more important since regulations started obliging banks to use separate procedures in assessing SMEs' credit worthiness. However, current accounting-based models for SMEs do not account for the impact of market information on default prediction. We fill this gap in the literature by introducing a hybrid default prediction model for unlisted SMEs that uses market information of listed SMEs (comparable approach) alongside existing accounting information of unlisted SMEs. Our results suggest that the accuracy of this default prediction modelling approach in the hold-out sample, during the period of the financial crisis 2007-09 and for the entire sample-period, improves considerably. We conclude that the proposed hybrid model is a good replacement for existing standard accounting-based methods on SMEs' default prediction.

Suggested Citation

  • Andrikopoulos, Panagiotis & Khorasgani, Amir, 2018. "Predicting unlisted SMEs' default: Incorporating market information on accounting-based models for improved accuracy," The British Accounting Review, Elsevier, vol. 50(5), pages 559-573.
    • Handle: RePEc:eee:bracre:v:50:y:2018:i:5:p:559-573
    DOI: 10.1016/j.bar.2018.02.003
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    2. Yu Zhao & Huaming Du & Qing Li & Fuzhen Zhuang & Ji Liu & Gang Kou, 2022. "A Comprehensive Survey on Enterprise Financial Risk Analysis from Big Data Perspective," Papers 2211.14997, arXiv.org, revised May 2023.
    3. Francesco Ciampi & Alessandro Giannozzi & Giacomo Marzi & Edward I. Altman, 2021. "Rethinking SME default prediction: a systematic literature review and future perspectives," Scientometrics, Springer;Akadémiai Kiadó, vol. 126(3), pages 2141-2188, March.
    4. Anna Burova & Henry Penikas & Svetlana Popova, 2021. "Probability of Default Model to Estimate Ex Ante Credit Risk," Russian Journal of Money and Finance, Bank of Russia, vol. 80(3), pages 49-72, September.
    5. Tingqiang Chen & Suyang Wang, 2023. "Incomplete information model of credit default of micro and small enterprises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2956-2974, July.
    6. Brasch, Annika & Eierle, Brigitte & Jarvis, Robin, 2022. "Research and development investments, development costs capitalization, and credit ratings: Exploratory evidence from UK R&D-active private firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 48(C).
    7. Salwa Kessioui & Michalis Doumpos & Constantin Zopounidis, 2023. "A Bibliometric Overview of the State-of-the-Art in Bankruptcy Prediction Methods and Applications," World Scientific Book Chapters, in: Emilios Galariotis & Alexandros Garefalakis & Christos Lemonakis & Marios Menexiadis & Constantin Zo (ed.), Governance and Financial Performance Current Trends and Perspectives, chapter 6, pages 123-153, World Scientific Publishing Co. Pte. Ltd..
    8. Alessandro Bitetto & Stefano Filomeni & Michele Modina, 2021. "Understanding corporate default using Random Forest: The role of accounting and market information," DEM Working Papers Series 205, University of Pavia, Department of Economics and Management.
    9. Stefano Filomeni & Udichibarna Bose & Anastasios Megaritis & Athanasios Triantafyllou, 2024. "Can market information outperform hard and soft information in predicting corporate defaults?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3567-3592, July.

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    More about this item

    Keywords

    SMEs finance; Merton-KMV model; Default prediction; Market-based factors; Accounting-based factors;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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