Measurement of SME risk and its relationship with SME operating characteristics: An empirical study in Malaysia

SMEs are inherently risky organisations reflected in high birth and death rates in many countries. This risk of failure is exacerbated by the financial and operational opacity of SMEs, which hamper efforts by authorities and investors to evaluate and value objectively SMEs. Despite a wide spread view that SMEs are risky there is little evidence of generalizable, empirical estimates SME risk and supporting analyses, covering the relationship between operational characteristics risk. Commencing from a premise that there needs to be a robust framework for quantifying SME risk this research examines, using a Malaysian database, risk measures and their relationship to observable attributes of SMEs. The work is important for a range of stakeholders, including government in relation to sustainable economic growth goals and other areas of public policy. Investors, customers, suppliers, employees and society are unlikely to benefit from business churn where some of it is avoidable. Malaysia, one of the larger economies in Southeast Asia (by GDP) is a multi-cultural country with a diversity of ethnicities. In the 1990s, it, along with various other East Asian countries underwent an economic boom that subsided with the onset of the Asian financial crisis in 1998. It is a constitutional monarchy with members of the royal Malay families assuming the role, in rotation, of Head of State. Given its diverse demographic, Malaysia actively practices an affirmative action scheme designed to give indigenous people (the Bumiputera) better access to finance, education and business opportunities to promote greater economic parity across the different ethnicities living in the country. Islam is the State religion with close to 60% of the population practicing the religion. As such, Islamic finance is widely available and has come to characterise Malaysian fiscal policy as being very conservative and risk-averse in accordance with Islamic principles. SMEs in Malaysia are predominantly family-owned and control is often centralised in the hands of the family, with very few outsiders rising to high managerial positions within these businesses. There is little to no separation between management and shareholders as they are typically the same. This lack of separation creates unique governance issues where the CEO and the Chairman of the board are often the same person. This creates a conflict of interest between the principal (owner) and the agent (manager) as there are weaker checks and balances performed against the CEO if they are the head of the Board of Directors. However, in a family business, because the CEO/Chairman is the head of the family, principal-agent conflict is virtually eliminated as the CEO and the Chairman’s goals align. Despite this, principal-principal conflict still exists through leadership tussles, nepotism and poor consensus decision making. SMEs have contributed significantly to the Malaysian GDP and play a very important role in the economic development of Malaysia. The Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia - SSM) records SME data, as all Malaysian businesses, regardless of their size are required to furnish the authorities with regular annual reports. The initial dataset consists of an unbalanced panel dataset of 400 individual companies over the years 2005 to 2014. After data cleaning and removal of dormant and insolvent companies, this figure is reduced to 303 individual companies. The current research draws on the information covering financial statements; owner ethnicity, age and gender; business location; shareholding and items stored in the database, providing a rich panel of data for businesses over time. Most empirical risk and return measures, relating to models like Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) originate from research with publicly listed companies and initially in large mature western economies. For SME research, where firms are not listed on stock exchanges, other approaches are necessary. Four models are examined in this thesis, viz. the pure-play (PP) beta, accounting beta and two probability of survival models (1 & 2). These models noted in prior research are tractable within the constraints of data typically available for SMEs and are present in the SSM database. A selection of SME characteristics identified in the literature as connected with SME risk, these include financial indicators such as performance and capital structure; firm characteristics such as firm size, firm age, the firm’s sub-industry and firm’s geographical location; and owner demographics such as owner age, largest share percentage, business owner gender and business owner ethnicity. The analysis consists of two parts. First, a correlation analysis of the risk metrics against the other SME characteristics. The correlation analysis shows that PP beta has the highest level of correlation with not only the other risk measures but also the SME characteristics. The other risk measures have lower cases of significant correlation with the accounting beta having the lowest number of significant correlations with SME characteristics. Second, each risk value is regressed against the SME characteristics using the Dynamic Panel Data Generalised Method of Moments (GMM) regression technique, which effectively captures the panel nature of the data and mitigates the threat of endogeneity. The regression results show that the PP beta measurement has the most significant relationships with the selected SME characteristics, most notably in areas of financial performance and gender of the business owner. The other measurements recorded significant relationships in the same areas as well as capital structure. Interestingly, despite Malaysia’s affirmative action policies, there is no significant relationship between any of the risk measures and business ethnicity. Furthermore, despite a large portion of Malaysian SMEs involved in the service sector, the type of industry SMEs are in do not significantly affect their risk either. The presence of family ownership as represented by concentration of ownership in the largest share percentage is not significantly related to risk, indicating that principal-principal conflict does not adversely affect Malaysian SMEs. Firm size and firm age both are not significantly related to SME risk, providing some hope for smaller, younger businesses trying to convince finance providers to invest in them. Owner age is significantly related to the probability of survival model 1, however it does not significantly relate to any of the other risk measures. The identification of significant relationships between capital structure with SME risk is relevant to lenders and can assist them in pricing their loans to SMEs. The finding that neither firm size nor age are not statistically significantly correlated with SME risk has implications for loan terms and bargaining. The research concludes that PP beta, used in conjunction with a probability of survival model provides the most adequate measure of risk for unlisted SMEs. Combined with the results from the regression, this research challenges some long-standing assumptions held regarding the relationship between SME characteristics and risks in the hopes that the findings will influence policy makers and finance providers to give better financial and development support to SMEs

Assessment of seismic vulnerability in reinforced concrete buildings in Tawau, Sabah: A study on damage potential

Tawau located in Sabah is deemed to possess a moderate level of seismic activity, primarily because previous earthquakes were concentrated in the Lahad Datu-Tawau region due to the existence of an active fault. Regrettably, a significant number of reinforced concrete (RC) buildings in this area lack awareness and comprehension of earthquake-resistant construction practices, which necessitate the evaluation of building vulnerability in high-seismichazard zones. The goals of this study are to conduct fieldwork for the evaluation of the damage potential on 105 existing RC buildings and develop a building damage map in the Tawau area. This entails employing Rapid Visual Screening (RVS) surveys in accordance with the FEMA P-154 guidelines, employing a scoring system to assess the potential for damage in buildings, and subsequently presenting the results on a map. The results of this survey reveal that most buildings in this study exhibit plan irregularities and vertical irregularities in their beams do not align with columns and weak or/and soft story, respectively. This survey concludes that the most prevalent damage potential among the surveyed buildings in this area is Grade 3, followed by Grade 4, with the least prevalent being buildings with a Grade 2 damage potential

Small Family Businesses: Innovation, Risk and Value

This article reviews the literature and applies principal-to-principal (PP) conflict theory to small family based businesses. The lack of accurate measurement and communication of risk leading to issues with innovation, is the primary cause of PP agency costs. Careful analysis of the risk levels reflected in the cost of debt and opportunity cost of equity provides a theoretically robust and empirically estimable process for ascertaining the true PP agency cost. Awareness of the constraining governance structures and the suggested method, based on the cost of capital, to assess small business risk can assist SME owners and financiers to SMEs to promote business efficiency and innovation

Small family businesses: Innovation, risk and value

This article reviews the literature and applies principal-to-principal (PP) conflict theory to small family based businesses. The lack of accurate measurement and communication of risk leading to issues with innovation, is the primary cause of PP agency costs. Careful analysis of the risk levels reflected in the cost of debt and opportunity cost of equity provides a theoretically robust and empirically estimable process for ascertaining the true PP agency cost. Awareness of the constraining governance structures and the suggested method, based on the cost of capital, to assess small business risk can assist SME owners and financiers to SMEs to promote business efficiency and innovation

Damage Prediction Observation for Existing Buildings in Sabah under Moderate Risk Earthquakes

Seismic design in building construction is still new in Malaysia. Sabah, a Malaysian state, is situated southeast of the Eurasian Plate, between the highly active Philippine Sea Plate and Indo-Australian Plate, and has a history of earthquakes, with the largest measuring a magnitude of 6.3 (2015). Although small earthquakes occur annually, most old buildings in Sabah were built pre-code and designed without considering earthquake loadings. This study aimed to analyze the potential damage to buildings in Sabah based on their vulnerability to moderate earthquakes. More than 500 buildings in seven districts were evaluated using a quantitative method based on score assignment, within 100 kilometers of the epicenters. According to the findings, more than 160 buildings in the Kota Kinabalu and Kudat districts were assessed as vulnerable to Grade 4 damage. In Ranau, Kota Marudu, Tawau, Semporna, and Lahad Datu, most buildings had a Grade 3 damage potential, with some at Grade 2 or 4. This study’s findings provide a summary of the damage risk for structures in Sabah and offer a starting point for planning and developing safer buildings that can withstand local seismic conditions. The resulting building-grade damage map can be used as a reference for future damage mitigation measures

Sectarianism and political order in Iraq and Lebanon

Although Iraq and Lebanon are deeply divided societies, they have followed varying political trajectories. Whilst Lebanon has accommodated sectarianism within a consociational democracy since its inception, until 2003 Iraq had an authoritarian regime that ostensibly repressed sectarianism. However, after 2003, Iraqi politics began to converge with the consociationalism of Lebanon. Taking a longitudinal approach, this study explains this puzzle by focusing on one factor: sectarianism. It asks how and why sectarianism has shaped the political trajectories and regime types in the two cases and, conversely, how sectarianism has been shaped by these trajectories and regimes