Failure patterns amongst small firms and their financial symptoms : A test of hypotheses

Abstract

Financial indicators have been widely used in the business failure literature in order to predict the risk of failure of firms (Beaver, 1966; Altman, 1968; Barnes, 1987; Aziz et al., 1988). In contrast, financial ratios have been less commonly used in a more preventive perspective to failure (Van Wymeersch and Wolfs, 1996; Van Caillie, 2000; Balcaen and Ooghe, 2006). Nevertheless, in a preventive perspective to small business failure, it is important to better understand how financial symptoms combine over time (Ooghe and Van Wymeersch, 1986) and to identify if relationships can be traced between the fundamental causes of failure and specific financial indicators. Considering this last statement and with reference to the explanatory business failure patterns (EBFPs) identified by Crutzen (2009) amongst a sample of small firms, this paper tests a series of hypotheses which aim at determining if these (causal) patterns can be associated with some specific financial indicators and, if so, if small distressed firms can be associated to one particular EBFP on the basis of the financial information published in the annual accounts. If each EBFP leads to some specific financial symptoms, then it will be possible to get a proxy information about the fundamental problems inducing failure without having any access to internal information, this identification being considered as a crucial step in the elaboration of any recovery or takeover plan (Argenti, 1976; Gaskill et al., 1993).Peer reviewe