The determinants of insolvency and the strategic responses of Thai small and medium-sized enterprises : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

This thesis comprises three essays that examine the key determinants of insolvency among Thai small and medium-sized enterprises (SMEs) and their strategic responses, focusing on financial ratios in Essay One, public officials’ corruption in Essay Two, and the local business sentiment index in Essay Three. The study uses a comprehensive dataset of 5,150 juristic persons across 77 Thailand’s provinces, covering the manufacturing, trading and services sectors from 2017 to 2021. Essay One examines the predictive power of firm-level financial ratios on the probability of Thai private SMEs’ insolvency. The analysis identifies inventory turnover, accounts payable turnover, assets-to-equity ratio, and debt-to-assets ratio as significant determinants of insolvency risk across all three sectors. Sector-specific findings reveal that accounts receivable turnover has the greatest marginal effect in reducing insolvency risk in the manufacturing sector; total asset turnover plays a similarly influential role in the trading sector; and gross profit margin is the most impactful ratio in the services sector. The essay shows that medium-sized enterprises, juristic ordinary partnerships and firms with foreign ownership face significantly lower insolvency risk than other firms. Firms located in regional areas are less likely to become insolvent than those located in the central region, which includes the capital and major metropolitan provinces that generally have more intense market competition. The essay provides practical implications for policymakers and SME managers that emphasize the importance of monitoring and leveraging key financial ratios to enhance firm performance, ensure business continuity and support broader economic development. Essay Two examines the impact of public officials’ corruption on the insolvency risk of Thai private SMEs and the financial strategies firms adopt in response. The findings support the "sanding the wheels" hypothesis, which indicates that corruption increases the likelihood of insolvency among Thai SMEs. The analysis reveals that the negative impact of corruption is more pronounced for mature firms and Thai-owned firms than for new firms and foreign-owned ones. In response to corruption, mature firms, Thai-owned firms and foreign-owned firms tend to increase cash holdings as a strategy to maintain operational flexibility from the "grabbing hand" of corrupt officials. Mature firms and Thai-owned firms increase leverage, particularly when internal financial resources are insufficient. However, there is no association between corruption and the financial policies for new Thai SMEs. The essay shows that holding higher levels of cash in a corrupt environment helps mitigate insolvency risk for mature firms and Thai-owned firms. In contrast, increased leverage under high corruption tends to exacerbate insolvency risk across mature firms, Thai-owned and foreign-owned firms. These findings offer important policy implications. They suggest the establishment of provincial business facilitation centres to streamline administrative procedures and reduce opportunities for corruption. Such initiatives could improve Thailand’s ranking in both the Ease of Doing Business Index and the Corruption Perceptions Index. Essay Three examines the impact of the local Business Sentiment Index (local BSI) on the insolvency risk and trade credit behaviours of Thai SMEs. The local BSI index is constructed using a set of local sentiment indices and macroeconomic indicators. The study reveals that a higher local BSI reduces the probability of insolvency and enhances the trade credit supply and trade credit demand among Thai SMEs. The study also finds no synergistic effect between local BSI and trade credit in mitigating insolvency risk and that firms increased trade credit supply during the COVID-19 pandemic, in line with the redistribution theory. However, to preserve liquidity SMEs in higher local BSI areas became more risk-averse, reducing trade credit supply and net investment in trade credit during the COVID pandemic. This suggests trade credit supply is used proactively in stable times but conservatively during crises for SMEs in local areas with higher BSIs. The results indicate that older, larger and foreign-owned firms are more active in trade credit markets, reflecting stronger creditworthiness. These findings highlight the importance of fostering local business sentiment and supporting SMEs in trade credit management. Policymakers should recognize local BSIs as early economic signals and promote prudent trade credit strategies to enhance financial resilience and long-term SME sustainability.