This work analyses whether financial information quality is relevant to explaining firms’ probability of default. A financial default prediction model for SMEs (Small and Medium Enterprises) is presented, which includes not only traditional measures but also financial reporting quality (FRQ) measures. FRQ influences the decision-making due to its impact on financial information, which has repercussions on the accounting ratios’ informativeness. A panel data of 1560 Portuguese SMEs in the construction sector, from 2012 to 2018, is analysed. First, firms are classified as default or compliant using an ex-ante criterion which allows us to identify signs of financial constraints in advance. Then, the stepwise method is employed to identify which variables are more relevant to explain the default probability. Results show that FRQ measures, namely accruals quality and timeliness, impact firms’ defaulting, supporting their relevance in predicting financial difficulties. Finally, using a logit approach, the accuracy of the model increased when FRQ variables were included. Results are confirmed using “new age” classifiers, namely the random forest methodology. This work is not only relevant to the extant financial distress literature but has also relevant implications for practice since stakeholders can understand the impact of financial reporting quality to prevent additional risks.

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This chapter aims to understand which determinants are more relevant to explain each source of financing for the Portuguese civil construction sector SMEs (small and medium enterprises). For this purpose, an unbalanced panel data sample of 407 firms from 2010 to 2018 is analyzed. Five capital structure proxies are used: total debt, short-term debt, medium and long-term debt, financial debt, and trade credit. Through the stepwise method, the most accurate determinants were selected and were then used in the estimation of five models using the panel data. Results show that the relevance of the determinants is different depending on the capital structure proxy. Profitability and age are the most relevant variables since impact all proxies of capital structure analyzed. Moreover, companies' size, liquidity and assets turnover, and inflation and interest rates are also relevant to explain companies' capital structure. The generality of the findings confirms the pecking order theory, but the trade-off theory also explains some results.

Understanding the reasons of default risk is crucial to avoid the firm's bankruptcy. The purpose of this work is to analyze the impact of internationalization on firm's probability of distress. For it, this chapter aims to propose a model to predict default specific to family SMEs (small and medium enterprises). An unbalanced panel of 10,832 firms over the period from 2012-2018 is analyzed. Ex-ante criteria to classify firms in default or compliant is used. International SMEs have lower probability of default than domestic firms, and compliant firms export more. Results show that export ratio is an important determinant of the probability of default. Moreover, the ratios of liquidity, profitability, size, leverage, efficiency, cash flow, and age are also relevant. Moreover, these ratios explain default risk of both groups international and domestic SMEs. The proposed model has an accuracy of 92.9%, which increases to 95.6% if only export SMEs are analyzed.

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