Does size matter in predicting SMEs failure?

Abstract This study acknowledges the diversity between micro, small, and medium‐sized firms while predicting bankruptcy and financial distress of the United States small and medium‐sized enterprises. Empirical findings suggest that survival (failure) probability increases (decreases) with increasing firm size and firms in different size categories have varying determinants of bankruptcy, whereas factors affecting their financial distress are mostly invariant. Magnitude of significant covariates changes across the size categories of both bankrupt and financially distressed firms. Further, operating cash flow information does not add any marginal increment in prediction performance of multivariate hazard models above baseline models developed using information from income statements and balance sheets. This result holds for failure likelihood of small and medium‐sized enterprises and their respective size categories.