Credit Risk and Survival Prospects of Female businesses (SMEs) in Scotland, and their response to economic shocks

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My research project aims to model the credit risk profile of female-owned/controlled Small and Medium-sized Enterprises (SMEs) in Scotland, and to predict the impact of economic shocks on their credit worthiness. The central hypothesis is that, due to gender differences, female SMEs have a more adverse credit risk profile (i.e. greater probability of default), and are less likely to survive in periods of economic instability. However, this hypothesis has never been tested empirically for female-SMEs in Scotland.The key research questions to be addressed, therefore, are: Do female SMEs have a more adverse credit risk profile than males? Do existing theories of firm failure help to identify the key drivers that predict default probability for female SMEs? Are female SMEs more likely to fail following macro-economic 'shocks'? The outcomes of the project will provide insights into the measures needed to improve the survival chances of female-led SMEs and their creditworthiness. They contribute primarily to the field of Operational Research/Management Science. Operational Research uses quantitative analysis as a basis for management decision making. One of the most successful applications has been its use in the credit risk assessment of consumers and SMEs, with credit scoring methodologies used to build predictive models to assess borrowers' credit worthiness, measured by probability of default (PD). It is important to note that the fundamental purpose is prediction, based on discrimination and identifying covariates that improve prediction, as opposed to identifying and confirming causal relationships, which is more typically found in Finance e.g. in credit risk models for larger corporate firms. In Scotland, 99.8% of 340,000 businesses are SMEs. Female-owned businesses account for over 460k jobs (26.7% private sector employment) (FSB, 2018). However, the Small Business Survey Scotland (2018) reported that only 15% SMEs with employees were female-led, down 6% from 2017.There is currently a lack of academic research that models the relative 'success' of female SMEs, and specifically their survival over time. There are specific gaps in the academic literature in relation to the credit risk profile of SMEs run by women in Scotland, the risk determinants and drivers, and no research on how their credit worthiness is impacted by changes in macro-economic conditions. This leads to a lack of ability to predict how female SMEs will be impacted by future economic shocks.One of the limitations of using predictive credit models is the current lack of theoretical framework to identify relevant drivers of PD, as the value of the models rests with their ability to predict, rather than explain causality. However, there is an extensive body of academic research that has developed theories on the causes of firm failure e.g. Resource-dependence theory (Sheppard, 1995); Liability of newness hypothesis (Yang & Aldrich, 2017), and therefore this body of theory will be used as a starting point to identify key variables for the model, although emphasis will still remain on predictive ability.Psychological attributes theory suggests that women may typically be more risk averse, less competitive and less confident than men, and research has tested this in business/financial settings (e.g Charness & Gneezy, 2012; Kamas & Preston, 2012; Fisher & Yao, 2017). Even when research suggests it is more context, than gender attributes, that lead to observed differences, some of this contextual difference may be explained by human capital theory, whereby female entrepreneurs may have had less time to develop their skills/experience e.g. time off to start a family, or other social barriers.This leads to a hypothesis that female SMEs may be less 'credit-worthy' and that they will suffer more in the event of economic shocks, where ability to compete may be key to survival. However, this hypothesis is yet to be tested with empirical research.