Default prediction of small and medium enterprises: Portuguese construction sector
Journal of Financial Management of Property and Construction
ISSN: 1366-4387
Article publication date: 19 June 2023
Issue publication date: 13 November 2023
Abstract
Purpose
This paper aims to study the default risk of small and medium-sized enterprises in the construction sector.
Design/methodology/approach
An unbalanced sample of 2,754 Portuguese companies from the construction sector, from 2008 to 2020, is analysed. Companies are classified in default or compliant following an ex-ante criterion. Then, using the stepwise analysis, the most relevant variables are selected, which are later used in the logit model. To verify the robustness of the results, a sample of legally insolvent companies is added (mixed criterion) and the initial sample is split into two subperiods.
Findings
Financial variables are the most relevant to predict the pattern for this sample. The main conclusions show that smaller and older companies, more indebted, with more liquidity and with higher EBIT have a higher probability of default. These conclusions are confirmed using a mixed criterion to classify companies as default or compliant and including a macroeconomic dummy.
Practical implications
This work not only contributes to enlarging the literature review but also makes relevant contributions to practice. Companies from the construction sector can understand which indicators must control to avoid financial problems. The government also has relevant information that can help in adapting or creating regulations for recovering or revitalizing companies.
Originality/value
This study proposed an ex-ante criterion that can be used for all types of companies. Most works use a legal or a mixed criterion that does not allow for detecting signs of financial problems in advance. Moreover, the sample used is almost unexplored – SMEs from a sector with great mortality rate.
Keywords
Acknowledgements
This research was supported by National Funds of the FCT – Portuguese Foundation for Science and Technology within the project [UIDB/04928/2020].
Citation
Costa, M. and Lisboa, I. (2023), "Default prediction of small and medium enterprises: Portuguese construction sector", Journal of Financial Management of Property and Construction, Vol. 28 No. 3, pp. 439-458. https://doi.org/10.1108/JFMPC-01-2022-0004
Publisher
:Emerald Publishing Limited
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