Is financial distress risk important for manufacturing SMEs to rebalance the short-term debt ratio?
ISSN: 1526-5943
Article publication date: 6 October 2022
Issue publication date: 31 October 2022
Abstract
Purpose
This study seeks to analyse if the adjustment towards the target short-term debt ratio of small and medium-sized firms (SMEs) is related to financial distress risk.
Design/methodology/approach
Data obtained for a sample of Portuguese manufacturing SMEs from 2010 to 2017 were analysed using the system-generalised method of moments (GMM-sys). Using the modified Z-Altman score, the authors classify SMEs according to their exposure to financial distress risk.
Findings
Manufacturing SMEs exposed to a high risk of financial distress rebalance their short-term debt ratio quicker. However, regardless of the financial distress risk level, SMEs distant from the target short-term debt ratio adjust more slowly, suggesting that transaction costs are greater than financial distress costs.
Practical implications
Policymakers should promote the access to external sources of finance with low transaction costs for SMEs, exposed to low levels of financial distress risk, to rebalance their short-term debt ratios quicker. Distressed SMEs far from their target short-term debt ratios, but with capacity to rebalance, need government programmes to access finance with low transaction costs to rebalance their short-term debt ratios.
Originality/value
This paper contributes to deepening our understanding of how SMEs, facing financial risk, rebalance their short-term debt ratios. SMEs, facing high financial distress risk, adjust towards their target short-term debt ratios more rapidly. However, SMEs, distant from the target short-term debt ratio face higher transaction costs than financial distress costs. These firms adjust towards their target short-term debt ratios more slowly, which may aggravate the refinancing risk and, ultimately, announce bankruptcy.
Keywords
Acknowledgements
This paper is financed by National Funds of the FCT – Portuguese Foundation for Science and Technology within the projects CEFAGE-UBI UIDB/04007/2020, NECE UIDB/04630/2020, NIPE - UIDB/03182/2020; GOVCOPP - UIDB/04058/2020.
Citation
Sardo, F., Serrasqueiro, Z., Vieira, E. and Armada, M.R. (2022), "Is financial distress risk important for manufacturing SMEs to rebalance the short-term debt ratio?", Journal of Risk Finance, Vol. 23 No. 5, pp. 516-534. https://doi.org/10.1108/JRF-12-2021-0207
Publisher
:Emerald Publishing Limited
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