Forecasting Bankruptcy for SMEs Using Hazard Function: To What Extent Does Size Matter?

Posted: 23 Feb 2013 Last revised: 28 Oct 2015

See all articles by Jairaj Gupta

Jairaj Gupta

University of Birmingham

Andros Gregoriou

University of Brighton

Jerome Healy

Hull University Business School (HUBS)

Date Written: August 20, 2013


A huge diversity exists within the broad category of SMEs. They differ widely in their capital structure, firm size, access to external finance, management style, numbers of employees etc. We contribute to the literature by acknowledging this diversity while modeling credit risk for them, using a relatively large UK database, covering the analysis period between 2000 and 2009. Our analysis partially employs the definitions provided by the European Union to distinguish between micro, small, and medium firms. We use both financial and non-financial information to predict firm’s failure hazard. We estimate separate hazard models for each sub-category, and compare their performance with a SMEs hazard model including all the three sub-categories. We test our hypotheses using discrete-time duration-dependent hazard rate modelling techniques, which controls for both macro-economic conditions and survival time. Our test results strongly highlight differences in the credit risk attributes of micro firms and SMEs. Simultaneously, the results does not show significant marginal improvements in the classification performance of our hazard models for small and medium firms, over the model developed for SMEs as a whole, while suggesting that there is no need to consider small and medium firms’ category separately while modelling credit risk for them.

Keywords: bankruptcy prediction, discrete-time hazard model, time-varying covariate, duration-dependent hazard rate, SME, Small and Medium Enterprises

JEL Classification: G33

Suggested Citation

Gupta, Jairaj and Gregoriou, Andros and Healy, Jerome, Forecasting Bankruptcy for SMEs Using Hazard Function: To What Extent Does Size Matter? (August 20, 2013). Review of Quantitative Finance and Accounting, Vol. 45, No. 4, 2015, Available at SSRN: or

Jairaj Gupta (Contact Author)

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom
00-44-7795904913 (Phone)

Andros Gregoriou

University of Brighton ( email )

Brighton, BN2 4AT
United Kingdom

Jerome Healy

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

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