Economics at your fingertips  

Is the Financial Report Quality Important in the Default Prediction? SME Portuguese Construction Sector Evidence

Magali Costa (), Inês Lisboa () and Ana Gameiro ()
Additional contact information
Magali Costa: Center for Advanced Studies in Management and Economics (CEFAGE), School of Management and Technology, Polytechnic of Leiria, 2411-901 Leiria, Portugal
Inês Lisboa: CARME—Centre of Applied Research in Management and Economics, School of Management and Technology, Polytechnic of Leiria, 2411-901 Leiria, Portugal
Ana Gameiro: School of Management and Technology, Polytechnic of Leiria, 2411-901 Leiria, Portugal

Risks, 2022, vol. 10, issue 5, 1-24

Abstract: This work analyses whether financial information quality is relevant to explaining firms’ probability of default. A financial default prediction model for SMEs (Small and Medium Enterprises) is presented, which includes not only traditional measures but also financial reporting quality (FRQ) measures. FRQ influences the decision-making due to its impact on financial information, which has repercussions on the accounting ratios’ informativeness. A panel data of 1560 Portuguese SMEs in the construction sector, from 2012 to 2018, is analysed. First, firms are classified as default or compliant using an ex-ante criterion which allows us to identify signs of financial constraints in advance. Then, the stepwise method is employed to identify which variables are more relevant to explain the default probability. Results show that FRQ measures, namely accruals quality and timeliness, impact firms’ defaulting, supporting their relevance in predicting financial difficulties. Finally, using a logit approach, the accuracy of the model increased when FRQ variables were included. Results are confirmed using “new age” classifiers, namely the random forest methodology. This work is not only relevant to the extant financial distress literature but has also relevant implications for practice since stakeholders can understand the impact of financial reporting quality to prevent additional risks.

Keywords: financial report quality; default; financial distress; logit; random forest; SME; construction sector (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf) (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Risks is currently edited by Dr. Sheryl Yin

More articles in Risks from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().

Page updated 2022-07-02
Handle: RePEc:gam:jrisks:v:10:y:2022:i:5:p:98-:d:809228