The Value of Operating Cash Flow in Modeling Credit Risk for SMEs

Posted: 25 Nov 2012 Last revised: 28 Apr 2014

See all articles by Jairaj Gupta

Jairaj Gupta

University of Birmingham

Nick Wilson

University of Leeds - Credit Management Research Centre; Leeds University Business School; University of Leeds - Faculty of Business

Andros Gregoriou

University of Brighton

Jerome Healy

Hull University Business School (HUBS)

Date Written: April 20, 2013

Abstract

Small and medium size enterprises (SMEs) play a fundamental role in the economic performance of major economies especially in light of the new Basel Capital Accord. Several lending communities proposed to treat SMEs as retail clients to optimize capital requirements and profitability. In this context it is becoming critically important to have a detailed understanding of its risk behavior for appropriate risk pricing. Evidence pertaining to SMEs financing strongly motivates us to believe that firms which are unable to generate sufficient operating cash flow (OCF) are more susceptible to bankruptcy. However, the role of OCF in bankruptcy of SMEs lacks empirical validation. We are the first to investigate the role of operating cash flow information as predictors in assessing the creditworthiness of SMEs. One-year distress prediction model developed using significant financial information of United Kingdom SMEs over a period of 2000 to 2009 confirm that the presence of operating cash flow information does not improve the prediction accuracy of the distress prediction model.

Keywords: Credit Risk Modeling, Bankruptcy, Corporate Failure, SME, Small and Medium Enterprises

Suggested Citation

Gupta, Jairaj and Wilson, Nicholas and Gregoriou, Andros and Healy, Jerome, The Value of Operating Cash Flow in Modeling Credit Risk for SMEs (April 20, 2013). Applied Financial Economics, Vol. 24, No. 9, 2014, Available at SSRN: https://ssrn.com/abstract=2180313 or http://dx.doi.org/10.2139/ssrn.2180313

Jairaj Gupta (Contact Author)

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom
00-44-7795904913 (Phone)

Nicholas Wilson

University of Leeds - Credit Management Research Centre ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Leeds University Business School ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

Andros Gregoriou

University of Brighton ( email )

Brighton
Brighton, BN2 4AT
United Kingdom

Jerome Healy

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

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