The Value of Non-Financial Factors in Business Failure Prediction: A Study of Swedish Small and Medium-Sized Enterprises

Abstract: Access to financing is frequently listed as a top concern among Europe's small and medium-sized companies. Accounting for two-thirds of Europe's aggregated gross domestic product, their ability to finance new initiatives is going to have a large impact on the overall economic development within the region. Improved business failure prediction models could help mitigate frictions in the capital provision process. Up to this point, most researchers have primarily focused on developing prediction models based on accounting data or market prices. As a result, little is known about the impact non-financial information may have on classification results. Using financial information for a sample of 27 527 unlisted Swedish small and medium- sized firms, of which 3.3% failed during the period 2009-2010, we develop a conventional business failure prediction model. Adding qualitative factors to the prediction model is found to improve the classification results by up to 5.4 percentage points. In addition to already established non-financial measures, we find that qualified audit opinions and information regarding auditor changes can be quantified and used as metrics to improve the overall classification results.