Financial and non-financial variables in predicting failure of small business reorganisation

The objective of this study is to predict the failures of small entrepreneurial firms re-organised according to the Finnish Company Reorganisation Act (FCRA). The purpose of FCRA is to assist temporarily financially distressed firms that are expected to make a viable recovery and able to pay their debts. The research sample consists of 80 legally reorganised firms for which reorganisation plans were confirmed by a court in 2000. These are small entrepreneurial firms with, on average, two to five employees. They are generally less than 20 years old and fall into different industrial categories. The purpose is to assess the importance of financial and non-financial variables in predicting their survival or failure in the reorganisation process. This importance is assessed by the Cox proportional hazards regression analysis, using the binary logistic regression analysis as a benchmark. In all, 38 (47.5%) of the sample firms went to bankrupt during the reorganisation programme. The results show that pre-filing financial variables are not efficient in predicting failure. However, non-financial variables (such as the use of active reorganisation actions) prove to be efficient predictors of failure. In classification accuracy, the Cox regression model is outperformed by the logistic regression model.