Corporate default prediction with payment disturbances in managers’ earlier entrepreneurial practices

Abstract

AbstractThis study aims to determine how payment disturbances in managers’ earlier entrepreneurial practices (PDMs) predict corporate default. Classical financial ratios have often failed to predict the default of micro-, small- and medium-sized firms with high accuracy, and therefore, the extant literature has been focused on searching novel non-financial predictors. In this study, an integrational theoretical framework about PDMs in corporate default prediction is created and respective hypotheses postulated. The empirical part of the paper applies the population of Estonian defaulted and non-defaulted firms with three different prediction methods, while the predictors included three variables portraying PDMs and four classical financial ratios. The results indicate that PDMs lead to more accurate predictions of corporate defaults than financial ratios do. Among the specific variables, the average tendency of earlier disturbances was the most accurate, followed by the maximum and frequency tendencies. Therefore, the prevalence of payment behaviour issues by means of size and duration is more common in the entrepreneurial history of managers of defaulted firms than in that of non-defaulted firms. Additionally, the role of size, age, business-to-business, international orientation, and serial entrepreneurship contexts on the results is outlined. By introducing novel variables, this study is valuable for corporate default prediction in practice, especially when financial variables for respective purpose are absent or when they fail to signal the forthcoming default.

Keywords

• Payment default prediction
• firm failure
• earlier entrepreneurial practices
• previous payment disturbances
• managerial behaviour
• financial ratios