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MODELLING BUSINESS FAILURE AMONG SMALL BUSINESSES IN NIGERIA

Year 2019, Volume: 6 Issue: 2, 72 - 81, 30.06.2019

Muhammad M. Ma’aji

https://doi.org/10.17261/Pressacademia.2019.1046

Abstract

Purpose - Despite the reported high bankruptcy rate among small businesses (SMEs) in Nigeria, this study is the first to develop failure prediction models specifically for SMEs using financial and non-financial variables.

Methodology - The study employed logistic regression to a sample of 344 SMEs during the period 2000–2014.

Findings- The increased in the predictive accuracy of the model shows that data relating to the age of business and location make a significant contribution. Additionally, the study finds that high leverage and operational expenses and low profitability are associated with SMEs failure. The prediction accuracy rate was 92.1 and 93.8 percent for model 1 and model 2 respectively.

Conclusion- The findings will serve as an early warning signal for management to take proactive measures to overcome the threats of failure. Financial institutions such as banks will benefit from this study as it will help them set their internal control systems and procedures to manage credit risk for SMEs.

Keywords

Business failure financial ratios non-financial information logistic regression small medium-sized enterprises

References

  • Abdullah, N., Ahmad, H. and Md. Rus, R. (2008). Predicting Corporate Failure of Malaysia's Listed Companies: Comparing Multiple Discriminant Analysis, Logistic Regression and the Hazard Model. International Research Journal of Finance & Economics, 15, pp. 201-217.
  • Abdullah, N., Ma’aji, M. and Khaw, H. (2016). The Value of Governance Variables in Predicting Financial Distress among Small and Medium-sized Enterprises in Malaysia. Asian Academy of Management Journal of Accounting and Finance, 12 (1), pp. 77-91.
  • Abiola, A., Felicia, O. and Folasade B. (2015). Predicting Bank Failure in Nigeria using Survival Analysis Approach. International Business Information Management Conference (22nd IBIMA), At Rome, Italy, 22.
  • ACCA (2013). The Growth Challenge. Available http://www.accaglobal.com/content/dam/acca/global/PDF- technical/small-business/pol-tp-tgc.pdf (November 14, 2016).
  • Agarwal, V. and Taffler, R. (2007). Twenty-five Years of the Taffler Z-score Model: Does it really have Predictive Ability? Accounting and Business Research, 37 (4), pp. 285-300.
  • Agusto & Co. (2016). Micro, Small & Medium Enterprises Industry Report – 2016. Available http://www.agusto.com/research-reports.php?id=66# (January 4, 2017)
  • Altman, E. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. Journal of Finance, 23, pp. 589-609.
  • Altman, E., and Loris, B. (1976). A financial Early Warning System for Over-the-counter Broker-dealers. Journal of Finance, 31 (4), pp. 1201-1217.
  • Altman, E., Sabato, G., and Wilson N. (2010). The Value of Non-financial Information in Small and Medium-sized Enterprise Risk Management. Journal of Credit Risk, 6 (2), pp. 95-127.
  • Altman, E., Iwanicz-Drozdowska, M., Laitinen, E. and Suvas, A. (2016). Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman’s Z-Score Model. Journal of International Financial Management & Accounting, 28 (2), pp. 131–171.
  • Akingbolu, R. (2010). Why 70% of SMEs Fail in Nigeria? Available http://www.thisdaylive.com/articles/ why-70-of-smes-fail-in-nigeria%20experts/71911/ (October 3, 2016).
  • Anderson, M., R. Banker, R. Huang and Janakiraman S. (2007). Cost Behavior and Fundamental Analysis of SGandA Costs. Journal of Accounting, Auditing and Finance, 22 (1), pp. 1-28.
  • Anyanwu, J. C. and Yameogo, N. D. (2015). Regional Comparison of Foreign Direct Investment to Africa: Empirical Analysis. African Development Review, 27 (4), pp. 345–363.
  • Arslan, Ö. and Karan M. (2009). Credit Risks and Internationalization of SMEs. Journal of Business Economics and Management, 10 (4), pp. 361-368.
  • Ayyagari, M., A. Demirgüç-Kunt and Maksimovic V. (2011). Small vs. Young Firms across the World – Contribution to Employment, Job Creation, and Growth. Working Paper, No. 5631.
  • Bauer, J. and Agarwal, V. (2014). Are Hazard Models Superior to Traditional Prediction Approaches? A comprehensive Test, Journal of Banking and Finance, 40, pp.432–442.
  • Beaver, W. (1967). Financial Ratios as Predictor of Failure. Journal of Accounting Research, 4, pp. 71-111.
  • Behr, P., and Guttler, A. (2007). Credit Risk Assessment and Relationship Lending: An Empirical Analysis of German Small and Medium-sized Enterprises. Journal of Small Business Management, 45 (2), pp. 194-213.
  • Central Bank of Nigeria (2014). Credit Delivery to Small and Medium Enterprises: Post Bank Consolidation in Nigeria. Occasional Paper, 53.
  • Deakin, E. (1972). A Discriminant Analysis of Predictors of Business Failure. Journal of Accounting Research, 10 (1), pp. 167-179.
  • Edmister, R. (1972). An Empirical Test of Financial Ratio Analysis for Small Business Failure Prediction. Journal of Financial and Quantitative Analysis, 7 (2), pp. 1477-1493.
  • Eniola, A. (2015). We can Double Lagos GDP, says Ambode. Available http://www.latestnigeriannews.com /news/1079836/we-can-double-lagos-gdp-says-ambode.html (January 3, 2016).
  • Ferreira, S., T. Grammatikos and Michala, D. (2014). Forecasting Distress in European SME Portfolios. Available http://ssrn.com/abstract=2266426 (September 24, 2016).
  • Hosmer Jr., D.W., Lemeshow, S. and Sturdivant, R.X. (2013), Applied logistic regression, John Wiley and Sons, New Jersey.
  • Jones, F. (1987). Current Techniques in Bankruptcy Prediction. Journal of Accounting Literature, 6, pp. 131-164.
  • Keasey, K., and Watson, R. (1987). Non-financial Symptoms and the Prediction of Small Company Failure: A Test of Argenti’s Hypotheses. Journal of Business Finance and Accounting, 14 (3), pp. 335-354.
  • Laitinen, T. and Kankaanpää, M. (1999). Comparative Analysis of Failure Prediction Methods: The Finnish Case. The European Accounting Review, 8 (1), pp. 67-92.
  • Low, S., F. Mat Nor and Yatim, P. (2001). Predicting Corporate Distress using Logit Model: The Case of Malaysia. Asian Academy of Management Journal, 6 (1), pp. 49-62.
  • Luppi, B., Marzo, M., and Scorcu, A. (2007). A Credit Risk Model for Italian SMEs. Working Papers, Dipartimento Scienze Economiche, Universita di Bologna.
  • Md. Rus, R., K. Nisham, R. Abdul Latif and Nadakkavil, Z. (2013). Ownership Structure and Financial Distressed. Journal of Advanced Management Science, 1 (4), pp. 363-267.
  • Modigliani, F. and Miller, M. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 53 (3), pp. 433-443.
  • Moscalu, M. (2012). Business Failure Prediction for Romanian SMEs using Multivariate Discriminant Analysis. Journal of economic-financial theory and practice, 4, pp. 457-466.
  • Myers, S. (1984). The Capital Structure Puzzle. Journal of Finance, 39, pp. 575–592.
  • Nnabugwu, F. (2015). MSMEs Employ 60m Nigerians, Accounts for 48% of GDP. Available http://www.vanguardngr.com/2015/05/msmes-employ-60m-nigerians-accounts-for-48-of-gdp/ (September 24, 2016).
  • Okozie, A. (2011). Capital Ratios as Predictors of Distress: A Case Study of the Nigerian Banking System. Global Journal of Human Social Science, 11 (3), pp. 46–55.
  • Olaniyi, T. (2007). Predicting Potential of Failure in Nigerian Banking Sector a Comparative Analysis of First Bank Plc, and Trade Bank Plc. Babcock Journal of Management and Social Sciences, 6 (1), pp.64-73.
  • Olukayode, R. and Somoye, C. (2013). The Impact of Finance on Entrepreneurship Growth in Nigeria: A Cointegration Framework. ACRN Journal of Entrepreneurship Perspectives, 2 (2), pp. 21-45.
  • Pederzoli, C. and Torricelli, C. (2010). A Parsimonious Default Prediction Model for Italian SMEs. Banks and Bank Systems, 5 (4), pp. 5-9.
  • Pervan, I., and Kuvek, T. (2013). The Relative Importance of Financial Ratios and Non-financial Variables in Predicting of Insolvency. Croatian Operational Research Review, 13 (4), pp. 187-197.
  • Robichek, A. and Myers, S. (1965). Optimal financing decisions, Englewood Cliffs, N.J.: PrenticeHall.
  • Service (2016). States & Regions. Available http://services.gov.ng/states (September 24, 2016).
  • Shane, S. (1996). Hybrid Organizational Arrangements and their Implications for Company Growth and Survival: A study of New Franchisors. Academy of Management Journal, 39 (1) pp. 216–234.
  • SME Corporation Malaysia, (2014). Annual Report 2013/2014. SME Corporation Malaysia. Retrieved from http://www.smecorp.gov.my/ index.php/en/resources/2015-12-21-11-07-06/sme-annual-report/book/6-annual-report-2013/2-annual-report
  • The Economist (2014). Africa’s New Number One. Available http://www.economist.com/news/leaders /21600685-nigerias-suddenly-supersized-economy-indeed-wonder-so-are-its-still-huge?frsc=dg%7Ca (September 24, 2016).
  • Wilson, A. and David, U. (2012). Predicting Corporate Business Failure in the Nigerian Manufacturing Industry. European Journal of Business and Management, 4, (10), pp. 86-93.
  • Zulridah, M. (2012). Corporate Governance and Corporate Failure: A Survival Analysis. Prosiding Perkem, 7 (1), pp. 684 – 695.

Year 2019, Volume: 6 Issue: 2, 72 - 81, 30.06.2019

Muhammad M. Ma’aji

https://doi.org/10.17261/Pressacademia.2019.1046

Abstract

References

  • Abdullah, N., Ahmad, H. and Md. Rus, R. (2008). Predicting Corporate Failure of Malaysia's Listed Companies: Comparing Multiple Discriminant Analysis, Logistic Regression and the Hazard Model. International Research Journal of Finance & Economics, 15, pp. 201-217.
  • Abdullah, N., Ma’aji, M. and Khaw, H. (2016). The Value of Governance Variables in Predicting Financial Distress among Small and Medium-sized Enterprises in Malaysia. Asian Academy of Management Journal of Accounting and Finance, 12 (1), pp. 77-91.
  • Abiola, A., Felicia, O. and Folasade B. (2015). Predicting Bank Failure in Nigeria using Survival Analysis Approach. International Business Information Management Conference (22nd IBIMA), At Rome, Italy, 22.
  • ACCA (2013). The Growth Challenge. Available http://www.accaglobal.com/content/dam/acca/global/PDF- technical/small-business/pol-tp-tgc.pdf (November 14, 2016).
  • Agarwal, V. and Taffler, R. (2007). Twenty-five Years of the Taffler Z-score Model: Does it really have Predictive Ability? Accounting and Business Research, 37 (4), pp. 285-300.
  • Agusto & Co. (2016). Micro, Small & Medium Enterprises Industry Report – 2016. Available http://www.agusto.com/research-reports.php?id=66# (January 4, 2017)
  • Altman, E. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. Journal of Finance, 23, pp. 589-609.
  • Altman, E., and Loris, B. (1976). A financial Early Warning System for Over-the-counter Broker-dealers. Journal of Finance, 31 (4), pp. 1201-1217.
  • Altman, E., Sabato, G., and Wilson N. (2010). The Value of Non-financial Information in Small and Medium-sized Enterprise Risk Management. Journal of Credit Risk, 6 (2), pp. 95-127.
  • Altman, E., Iwanicz-Drozdowska, M., Laitinen, E. and Suvas, A. (2016). Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman’s Z-Score Model. Journal of International Financial Management & Accounting, 28 (2), pp. 131–171.
  • Akingbolu, R. (2010). Why 70% of SMEs Fail in Nigeria? Available http://www.thisdaylive.com/articles/ why-70-of-smes-fail-in-nigeria%20experts/71911/ (October 3, 2016).
  • Anderson, M., R. Banker, R. Huang and Janakiraman S. (2007). Cost Behavior and Fundamental Analysis of SGandA Costs. Journal of Accounting, Auditing and Finance, 22 (1), pp. 1-28.
  • Anyanwu, J. C. and Yameogo, N. D. (2015). Regional Comparison of Foreign Direct Investment to Africa: Empirical Analysis. African Development Review, 27 (4), pp. 345–363.
  • Arslan, Ö. and Karan M. (2009). Credit Risks and Internationalization of SMEs. Journal of Business Economics and Management, 10 (4), pp. 361-368.
  • Ayyagari, M., A. Demirgüç-Kunt and Maksimovic V. (2011). Small vs. Young Firms across the World – Contribution to Employment, Job Creation, and Growth. Working Paper, No. 5631.
  • Bauer, J. and Agarwal, V. (2014). Are Hazard Models Superior to Traditional Prediction Approaches? A comprehensive Test, Journal of Banking and Finance, 40, pp.432–442.
  • Beaver, W. (1967). Financial Ratios as Predictor of Failure. Journal of Accounting Research, 4, pp. 71-111.
  • Behr, P., and Guttler, A. (2007). Credit Risk Assessment and Relationship Lending: An Empirical Analysis of German Small and Medium-sized Enterprises. Journal of Small Business Management, 45 (2), pp. 194-213.
  • Central Bank of Nigeria (2014). Credit Delivery to Small and Medium Enterprises: Post Bank Consolidation in Nigeria. Occasional Paper, 53.
  • Deakin, E. (1972). A Discriminant Analysis of Predictors of Business Failure. Journal of Accounting Research, 10 (1), pp. 167-179.
  • Edmister, R. (1972). An Empirical Test of Financial Ratio Analysis for Small Business Failure Prediction. Journal of Financial and Quantitative Analysis, 7 (2), pp. 1477-1493.
  • Eniola, A. (2015). We can Double Lagos GDP, says Ambode. Available http://www.latestnigeriannews.com /news/1079836/we-can-double-lagos-gdp-says-ambode.html (January 3, 2016).
  • Ferreira, S., T. Grammatikos and Michala, D. (2014). Forecasting Distress in European SME Portfolios. Available http://ssrn.com/abstract=2266426 (September 24, 2016).
  • Hosmer Jr., D.W., Lemeshow, S. and Sturdivant, R.X. (2013), Applied logistic regression, John Wiley and Sons, New Jersey.
  • Jones, F. (1987). Current Techniques in Bankruptcy Prediction. Journal of Accounting Literature, 6, pp. 131-164.
  • Keasey, K., and Watson, R. (1987). Non-financial Symptoms and the Prediction of Small Company Failure: A Test of Argenti’s Hypotheses. Journal of Business Finance and Accounting, 14 (3), pp. 335-354.
  • Laitinen, T. and Kankaanpää, M. (1999). Comparative Analysis of Failure Prediction Methods: The Finnish Case. The European Accounting Review, 8 (1), pp. 67-92.
  • Low, S., F. Mat Nor and Yatim, P. (2001). Predicting Corporate Distress using Logit Model: The Case of Malaysia. Asian Academy of Management Journal, 6 (1), pp. 49-62.
  • Luppi, B., Marzo, M., and Scorcu, A. (2007). A Credit Risk Model for Italian SMEs. Working Papers, Dipartimento Scienze Economiche, Universita di Bologna.
  • Md. Rus, R., K. Nisham, R. Abdul Latif and Nadakkavil, Z. (2013). Ownership Structure and Financial Distressed. Journal of Advanced Management Science, 1 (4), pp. 363-267.
  • Modigliani, F. and Miller, M. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 53 (3), pp. 433-443.
  • Moscalu, M. (2012). Business Failure Prediction for Romanian SMEs using Multivariate Discriminant Analysis. Journal of economic-financial theory and practice, 4, pp. 457-466.
  • Myers, S. (1984). The Capital Structure Puzzle. Journal of Finance, 39, pp. 575–592.
  • Nnabugwu, F. (2015). MSMEs Employ 60m Nigerians, Accounts for 48% of GDP. Available http://www.vanguardngr.com/2015/05/msmes-employ-60m-nigerians-accounts-for-48-of-gdp/ (September 24, 2016).
  • Okozie, A. (2011). Capital Ratios as Predictors of Distress: A Case Study of the Nigerian Banking System. Global Journal of Human Social Science, 11 (3), pp. 46–55.
  • Olaniyi, T. (2007). Predicting Potential of Failure in Nigerian Banking Sector a Comparative Analysis of First Bank Plc, and Trade Bank Plc. Babcock Journal of Management and Social Sciences, 6 (1), pp.64-73.
  • Olukayode, R. and Somoye, C. (2013). The Impact of Finance on Entrepreneurship Growth in Nigeria: A Cointegration Framework. ACRN Journal of Entrepreneurship Perspectives, 2 (2), pp. 21-45.
  • Pederzoli, C. and Torricelli, C. (2010). A Parsimonious Default Prediction Model for Italian SMEs. Banks and Bank Systems, 5 (4), pp. 5-9.
  • Pervan, I., and Kuvek, T. (2013). The Relative Importance of Financial Ratios and Non-financial Variables in Predicting of Insolvency. Croatian Operational Research Review, 13 (4), pp. 187-197.
  • Robichek, A. and Myers, S. (1965). Optimal financing decisions, Englewood Cliffs, N.J.: PrenticeHall.
  • Service (2016). States & Regions. Available http://services.gov.ng/states (September 24, 2016).
  • Shane, S. (1996). Hybrid Organizational Arrangements and their Implications for Company Growth and Survival: A study of New Franchisors. Academy of Management Journal, 39 (1) pp. 216–234.
  • SME Corporation Malaysia, (2014). Annual Report 2013/2014. SME Corporation Malaysia. Retrieved from http://www.smecorp.gov.my/ index.php/en/resources/2015-12-21-11-07-06/sme-annual-report/book/6-annual-report-2013/2-annual-report
  • The Economist (2014). Africa’s New Number One. Available http://www.economist.com/news/leaders /21600685-nigerias-suddenly-supersized-economy-indeed-wonder-so-are-its-still-huge?frsc=dg%7Ca (September 24, 2016).
  • Wilson, A. and David, U. (2012). Predicting Corporate Business Failure in the Nigerian Manufacturing Industry. European Journal of Business and Management, 4, (10), pp. 86-93.
  • Zulridah, M. (2012). Corporate Governance and Corporate Failure: A Survival Analysis. Prosiding Perkem, 7 (1), pp. 684 – 695.
There are 46 citations in total.

Details

Primary Language English
Subjects Business Administration
Journal Section Articles
Authors

Muhammad M. Ma’aji This is me 0000-0003-0787-6411

Publication Date June 30, 2019
Published in Issue Year 2019 Volume: 6 Issue: 2

Cite

APA Ma’aji, M. M. (2019). MODELLING BUSINESS FAILURE AMONG SMALL BUSINESSES IN NIGERIA. Journal of Economics Finance and Accounting, 6(2), 72-81. https://doi.org/10.17261/Pressacademia.2019.1046

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