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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" }
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