Bankruptcy Prediction: SMEs in The Hospitality Industry

• Main Authors: Zainol Abidin, Juraini, Abdullah, Nur Adiana Hiau, Khaw, Karren Lee-Hwei
• Format: Article
• Language: English
• Published: UUM Press 2021
• Subjects: HG Finance
• Online Access: https://repo.uum.edu.my/id/eprint/29218/1/IJBF%2016%2002%202021%2051-80.pdf; https://repo.uum.edu.my/id/eprint/29218/; https://doi.org/10.32890/ijbf2021.16.2.3

The objectives of this study are to predict bankruptcy risk among SMEs in the hospitality industry for a three-year horizon period and to investigate the factors that are significant in determining bankruptcy. The contribution of SMEs in the hospitality industry is essential as businesses in the hospitality industry are dominated by SME operators. However, the failure rate among SMEs is relatively high and almost 50 percent of hospitality establishments do not survive beyond five years of operation. The Stepwise logistic model was employed to determine significant predictors that could predict bankruptcy for the period of one year, two years and three years before bankruptcy. Return on assets and firm age were found to be significant in all periods while other variables were identified to be important at a specific period prior to bankruptcy. In addition to return on assets and firm age, debt ratio and total assets turnover were found to be significant predictors of bankruptcy one-year prior to bankruptcy. However, in the two years prior to bankruptcy, debt ratio and total assets turnover were no longer important but current ratio, ownership concentration and gender diversity were found to be significant. As for the three years prior to bankruptcy, additional variables namely debt-to-equity ratio and board size were found to be significant, but ownership concentration and gender diversity ceased to be important. The findings of this study contribute to the limited literature in predicting the bankruptcy risk of small firms for a three-year horizon period by providing empirical evidence from SMEs in the hospitality industry of Malaysia.