Using Financial Performance Measures for Modelling SME Credit Risk: A Thai Empirical Evidence

Abstract

This paper examines financial data from a sample of MSEs in Thailand to develop a model to identify businesses that are likely to survive financial difficulty. A total sample of 266 firms comprising financially distressed and good-standing firms was used. A parametric t-test was employed to establish differences between financial characteristics of the two groups of SMEs. Results show statistically significant differences (t values significant at .001) between the two groups of SMEs in the financial ratios used for modeling financial risk. Discriminant analysis is then conducted to develop a model for predicting the survival or failure likelihood of SMEs. The model hits a 95 percent accuracy level in properly classifying sample firms between the two groups. When adjusted for unequal sample size between the two groups, the accuracy of properly classifying by chance is 65 percent. A test of the model with a new sample shows validity of the model beyond the original sample, confirming that Thai SMEs failure is amenable to prediction to a statistically significant extent. The model shows that liquidity and leverage ratios are the most predictive of distress for Thai SMEs suggesting that Thai SME failure is largely attributed to debt crisis. The results of the study are expected to inform business decision makers in assessing sustainability of SMEs, business managers as an early warning mechanism, and policy makers in formulating economic policies concerning SMEs.