'Small Can Be Vulnerable' : Failure Prediction of Unlisted Companies

The number of corporate bankruptcies worldwide rose by about 14 per cent in 2008, and trend is continuing into 2009. The failure of a business is an event which can produce substantial losses (both direct and indirect) to creditors, shareholders and employees. Previous studies for modelling credit risk for large listed firms are extensive and gravitate between two approaches. i.e. the Z score approach using historical accounting data to predict insolvencies (Altman 1968) and the models which rely on the stock market information (Merton, 1974). Small and Medium enterprises are the predominant type of business in all OEDC economies and typically account for two thirds of all employment. In the UK, where out of the 1.2 Million firms that are registered less than 12,000 are listed in the stock exchange, it is the unlisted firms make up the majority of the firms which ultimately fail (Altman, Sabato and Wilson, 2007). In the US, privet companies contribute over 50% of the GDP. (Shanker and Astrachan, 2004). Although the flow of finance to this sector is much researched, it is interesting to note that research on credit risk management for small unlisted firms is relatively scarce. The objective of the paper is to propose a failure prediction methodology, which goes beyond some of the drawbacks of existing models and one that is particularly applicable for unlisted firms