Parsimonious Models of Financial Insolvency in Small Companies

Julio Pindado and Luis Rodrigues

Small Business Economics, 2004, vol. 22, issue 1, 66 pages

Abstract: This study is an extension of current research on insolvency diagnosis. We intend to demonstrate that in small firms, the relevant information for the preventive diagnosis of insolvency can be synthesised in a model built upon a more reduced number of economic and financial ratios than the ones generally used in this kind of study. Our approach produces parsimonious models that can extract information from publicly available accounting-financial data. We demonstrate that using an extensive exploratory stage that will monitor the effects of correlation between financial variables, we will be able to build relatively stable models with a small set of variables.

Date: 2004
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