Business & Management Studies

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.