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

Author

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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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    More about this item

    Keywords

    SMEs finance; Merton-KMV model; Default prediction; Market-based factors; Accounting-based factors;

    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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