The Effect of Size on the Failure Probabilities of SMEs: An Empirical Study on the US Market Using Discrete Hazard Model

Posted: 31 Aug 2016

See all articles by Izidin El Kalak

Izidin El Kalak

Cardiff Business School

Robert Hudson

Hull University Business School (HUBS)

Date Written: November 26, 2015

Abstract

This paper investigates the extent to which the size affects the SME probabilities of bankruptcy. Using a dataset of (11,117) US non-financial firms, of which (465) filed for insolvency under chapters 7/11 between 1980 and 2013. We forecast the bankruptcy probabilities by developing four discrete-time duration-dependent hazard models for SMEs, Micro, Small, and Medium firms. A comparison of the default prediction models for medium firms and SMEs suggests that an almost identical set of explanatory variables affect the default probabilities leading us to believe that treating each of these groups separately has no material impact on the decision making process. However, comparisons between the micro and small firms with the SMEs firms strongly suggest that these categories need to be considered separately when modelling their credit risk.

Keywords: SMEs; Bankruptcy; Size; Discrete-time duration-dependent hazard model

JEL Classification: G200

Suggested Citation

El Kalak, Izidin and Hudson, Robert, The Effect of Size on the Failure Probabilities of SMEs: An Empirical Study on the US Market Using Discrete Hazard Model (November 26, 2015). International Review of Financial Analysis, Vol. 43, No. 1, 2016, Available at SSRN: https://ssrn.com/abstract=2832111

Izidin El Kalak (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Robert Hudson

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

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