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Modelling small and medium-sized enterprises' failure in Malaysia

Author

Listed:
  • Nur Adiana Hiau Abdullah
  • Abd Halim Ahmad
  • Nasruddin Zainudin
  • Rohani Md Rus

Abstract

Small and medium-sized enterprises (SMEs) are acknowledged as significant contributors to development and growth in the economy. Since failure among SMEs is common, this study intends to build an accurate model that could predict SME failure. An analysis on 132 companies in 2000 to 2010 shows that higher gearing and lower profitability are associated with higher failure risk. In addition, the incorporation of the company's age significantly improves the model's predictive accuracy. Our result indicates that young SMEs rely heavily on debt, which leads them into distressed situations. To validate the predictive accuracy of the model, the area under the receiver operating characteristic (ROC) curve is utilised, suggesting that the inclusion of the non-financial variable significantly improves the model. The overall prediction accuracy rate ranges from 75% to 89% for the model developed with non-financial variables when applied to the one-year, two-year, three-year and four-year prior-to-default holdout samples.

Suggested Citation

  • Nur Adiana Hiau Abdullah & Abd Halim Ahmad & Nasruddin Zainudin & Rohani Md Rus, 2016. "Modelling small and medium-sized enterprises' failure in Malaysia," International Journal of Entrepreneurship and Small Business, Inderscience Enterprises Ltd, vol. 28(1), pages 101-116.
    • Handle: RePEc:ids:ijesbu:v:28:y:2016:i:1:p:101-116
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    Cited by:

    1. Francesco Ciampi & Alessandro Giannozzi & Giacomo Marzi & Edward I. Altman, 2021. "Rethinking SME default prediction: a systematic literature review and future perspectives," Scientometrics, Springer;Akadémiai Kiadó, vol. 126(3), pages 2141-2188, March.
    2. Ahmad, Abd Halim, 2019. "What factors discriminate reorganized and delisted distressed firms: Evidence from Malaysia," Finance Research Letters, Elsevier, vol. 29(C), pages 50-56.
    3. Juraini Zainol Abidin & Nur Adiana Hiau Abdullah & Karren Lee-Hwei Khaw, 2020. "Predicting SMEs Failure: Logistic Regression vs Artificial Neural Network Models," Capital Markets Review, Malaysian Finance Association, vol. 28(2), pages 29-41.

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