Predicting Unlisted SMEs' Default: Incorporating Market Information on Accounting-based Models for Improved Accuracy

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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.
Original languageEnglish
Pages (from-to)559-573
Number of pages15
JournalThe British Accounting Review
Volume50
Issue number5
Early online date3 Mar 2018
DOIs
Publication statusPublished - Sep 2018

Fingerprint

Small and medium-sized enterprises
Market information
Default prediction
Accounting information
Hybrid model
Prediction model
Modeling
Financial crisis
Small business
Accounting standards
Credit
Replacement
Lending

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in The British Accounting Review. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in The British Accounting Review, [(in press), (2018)] DOI: 10.1016/j.bar.2018.02.003

© 2018, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

  • SMEs finance
  • Merton-KMV model
  • default prediction
  • market-based factors
  • accounting-based factors

ASJC Scopus subject areas

  • Finance

Cite this

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title = "Predicting Unlisted SMEs' Default: Incorporating Market Information on Accounting-based Models for Improved Accuracy",
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.",
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author = "Panos Andrikopoulos and Amir Khorasgani",
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AB - 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.

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