Publication detail

A novel approach to estimating the debt capacity of European SMEs

KARAS, M. REŽŇÁKOVÁ, M.

Original Title

A novel approach to estimating the debt capacity of European SMEs

Type

journal article in Web of Science

Language

English

Original Abstract

Research background: The concept of debt capacity assumes that a maximum value of debt ratio exists that when exceeded triggers unfavourable consequences, such as drop in market value, default or a change in the business' creditworthiness. With the current state of the art there is a priori no theoretical assurance that such a specific value exists, or rather it is repre-sented by an interval of values. Beyond that, our understanding of debt capacity is often limited to a theoretical approximation by firm-specific factors, while the context of macroeco-nomic factors, especially those critical for SMEs, is neglected.Purpose of the article: The aim of this paper is to present a novel approach to estimating SMEs' debt capacity. Further, the aim is to answer the question of what firm-level and macro -economy conditions lead to exhausting the SMEs' debt capacity and under what conditions a specific value of maximum debt capacity could be estimated.Methods: To estimate the debt capacity, we suggest a use of an information entropy minimis-ing heuristic and the Minimal Description Length Principle. In this approach, the observed feature space is categorised into several regions. In this case, such a region represents a set of firm-and macroeconomy-specific conditions forming the debt capacity of the SMEs. To the best of our knowledge, such an approach has not yet been used in debt capacity applications.Findings & value added: We found out that the debt ratio itself provides little explanation of exhausted debt capacity, suggesting that high debt levels are compensated for by other fac-tors. By using the suggested approach, a set of more than 100 different regions was analysed. It was found that in case of five regions (sets of conditions) the debt capacity is exhausted, as the high level of debt has significant distress consequences.

Keywords

debt capacity;financial distress;macroeconomic factors;financial constraints

Authors

KARAS, M.; REŽŇÁKOVÁ, M.

Released

30. 6. 2023

Publisher

Institute of Economic Research

ISBN

1689-765X

Periodical

Equilibrium

Year of study

18

Number

2

State

Republic of Poland

Pages from

551

Pages to

581

Pages count

31

URL

http://economic-research.pl/Journals/index.php/eq/article/view/2483

Full text in the Digital Library

http://hdl.handle.net/11012/213739

BibTex

@article{BUT184342,
  author="Michal {Karas} and Mária {Režňáková}",
  title="A novel approach to estimating the debt capacity of European SMEs",
  journal="Equilibrium",
  year="2023",
  volume="18",
  number="2",
  pages="551--581",
  doi="10.24136/eq.2023.017",
  issn="1689-765X",
  url="http://economic-research.pl/Journals/index.php/eq/article/view/2483"
}

Documents

8_karas.pdf