Abstract
Small and medium-sized enterprises (SMEs) play a major role in economic development. Little research has examined the determinants of financial distress for SMEs in emerging economies due to limited data collection. This study aims to analyzes SMEs and integrate financial variables as suggested by previous studies, along with non-financial variables ignored in previous studies, by analyzing three distressed firms, and thereby identify the factors that explain the failure of SMEs.
Findings show that the correct prediction rate
prior to financial failure is 78.3%. In addition, surprisingly, if firms are
highly profitable, the owner uses a cash card, or the owner has less industry
experience, they are more likely to experience financial distress, in contrast
to previous results. Findings also show that as financial failure approaches,
the distressed firm often becomes more profitable for a short period, and may
even exhibit higher profitability than financially non-distressed firms. We
argue that financially distressed firms have higher earnings management
incentives to obtain bank financing than financially non-distressed firms. This
paper concludes with managerial and practical implications for financial
institutions and SMEs and offers future research directions.
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IJBMS by IPRPD is licensed under a Creative Commons Attribution 4.0 International License.