Bankruptcy prediction: the case of Belgian SMEs

The aim of this paper is to develop a bankruptcy prediction model for the Belgian small- and medium-sized enterprises (SMEs) through the building of a logit model that includes a selection of financial ratios.

Using a sample of 7,152 Belgian SMEs among which 3,576 were declared bankrupt between 2002 and 2012, the model, which includes control variables such as firm size and age, aims to test the predictive power of ratios reflecting the financial structure, the profitability, the solvency and the liquidity of firms.

The results report a satisfactory prediction accuracy and show that ratios as profitability and liquidity are excellent predictors of bankruptcy for Belgian SMEs.

Although the results seem to be conclusive, it could be noted that the healthy sample was not paired with the bankrupt sample. Other studies show that the use of paired samples makes it possible to increase the already good prediction rate. Also, further research could focus on intra-sectorial analysis.

Beside its contribution to the academic literature on bankruptcy prediction of Belgian SMEs, this study may be of interest for investors or managers to help them to anticipate bankruptcy risks. It can also be useful for banks and other credit institutions in the assessment of credit risk of firms. Thanks to such models, they could better identify firms with a higher risk of failure in their lending decisions.

Given the increasing number of SMEs in Belgium, their significant role in the economy, the specific characteristics of the country in terms of political decision making, the institutional differences between regions and the current uncertain economic circumstances, bankruptcy prediction seems to be a necessity for the country.

The originality of this paper lies in the fact that Belgian SMEs have been studied. This study may also be of interest to investors or managers because it may help them highlight accounting measures they should closely follow up to avoid bankruptcy.