Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector Evidence
This work analyses whether financial information quality is relevant to explaining firms’ probability of default. A financial default prediction model for SMEs (Small and Medium Enterprises) is presented, which includes not only traditional measures but also financial reporting quality (FRQ) measure...
| Main Authors: | , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2022-05-01
|
| Series: | Risks |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-9091/10/5/98 |
| _version_ | 1827666663638564864 |
|---|---|
| author | Magali Costa Inês Lisboa Ana Gameiro |
| author_facet | Magali Costa Inês Lisboa Ana Gameiro |
| author_sort | Magali Costa |
| collection | DOAJ |
| description | This work analyses whether financial information quality is relevant to explaining firms’ probability of default. A financial default prediction model for SMEs (Small and Medium Enterprises) is presented, which includes not only traditional measures but also financial reporting quality (FRQ) measures. FRQ influences the decision-making due to its impact on financial information, which has repercussions on the accounting ratios’ informativeness. A panel data of 1560 Portuguese SMEs in the construction sector, from 2012 to 2018, is analysed. First, firms are classified as default or compliant using an ex-ante criterion which allows us to identify signs of financial constraints in advance. Then, the stepwise method is employed to identify which variables are more relevant to explain the default probability. Results show that FRQ measures, namely accruals quality and timeliness, impact firms’ defaulting, supporting their relevance in predicting financial difficulties. Finally, using a logit approach, the accuracy of the model increased when FRQ variables were included. Results are confirmed using “new age” classifiers, namely the random forest methodology. This work is not only relevant to the extant financial distress literature but has also relevant implications for practice since stakeholders can understand the impact of financial reporting quality to prevent additional risks. |
| first_indexed | 2024-03-10T01:54:52Z |
| format | Article |
| id | doaj.art-4d916f0cb0d14e8d99c987a34618c852 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-10T01:54:52Z |
| publishDate | 2022-05-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-4d916f0cb0d14e8d99c987a34618c8522023-11-23T12:57:53ZengMDPI AGRisks2227-90912022-05-011059810.3390/risks10050098Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector EvidenceMagali Costa0Inês Lisboa1Ana Gameiro2Center for Advanced Studies in Management and Economics (CEFAGE), School of Management and Technology, Polytechnic of Leiria, 2411-901 Leiria, PortugalCARME—Centre of Applied Research in Management and Economics, School of Management and Technology, Polytechnic of Leiria, 2411-901 Leiria, PortugalSchool of Management and Technology, Polytechnic of Leiria, 2411-901 Leiria, PortugalThis work analyses whether financial information quality is relevant to explaining firms’ probability of default. A financial default prediction model for SMEs (Small and Medium Enterprises) is presented, which includes not only traditional measures but also financial reporting quality (FRQ) measures. FRQ influences the decision-making due to its impact on financial information, which has repercussions on the accounting ratios’ informativeness. A panel data of 1560 Portuguese SMEs in the construction sector, from 2012 to 2018, is analysed. First, firms are classified as default or compliant using an ex-ante criterion which allows us to identify signs of financial constraints in advance. Then, the stepwise method is employed to identify which variables are more relevant to explain the default probability. Results show that FRQ measures, namely accruals quality and timeliness, impact firms’ defaulting, supporting their relevance in predicting financial difficulties. Finally, using a logit approach, the accuracy of the model increased when FRQ variables were included. Results are confirmed using “new age” classifiers, namely the random forest methodology. This work is not only relevant to the extant financial distress literature but has also relevant implications for practice since stakeholders can understand the impact of financial reporting quality to prevent additional risks.https://www.mdpi.com/2227-9091/10/5/98financial report qualitydefaultfinancial distresslogitrandom forestSME |
| spellingShingle | Magali Costa Inês Lisboa Ana Gameiro Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector Evidence Risks financial report quality default financial distress logit random forest SME |
| title | Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector Evidence |
| title_full | Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector Evidence |
| title_fullStr | Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector Evidence |
| title_full_unstemmed | Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector Evidence |
| title_short | Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector Evidence |
| title_sort | is the financial report quality important in the default prediction sme portuguese construction sector evidence |
| topic | financial report quality default financial distress logit random forest SME |
| url | https://www.mdpi.com/2227-9091/10/5/98 |
| work_keys_str_mv | AT magalicosta isthefinancialreportqualityimportantinthedefaultpredictionsmeportugueseconstructionsectorevidence AT ineslisboa isthefinancialreportqualityimportantinthedefaultpredictionsmeportugueseconstructionsectorevidence AT anagameiro isthefinancialreportqualityimportantinthedefaultpredictionsmeportugueseconstructionsectorevidence |