Abstract
Using two research methodologies - the Altman’s z-score discriminant analysis, in the revised version referring to non-listed firms, and the Bayesian approach Diagnostic Distribution - the paper investigates the possibility of discriminating between healthy and bankrupt European SMEs based on financial statements and using a Bayesian discriminant model inspired by Altman’s model. It also aims to verify whether the geographic location of European SMEs influences the ability to discriminate between healthy versus bankrupt firms. The work finds a significant homogeneity regarding the capability of the new discriminant models to classify healthy and bankrupt SMEs within the Euro Area and in different geographic locations. The empirical observations confirm that financial statements are a relevant channel by which SMEs communicate information to the financial system, even if they cannot provide all the information that allows for healthy and bankrupt SMEs to be distinguished.
Highlights
The correct measurement and prediction of firms’ credit risk and bankruptcy risk is a topic of great interest for many stakeholders: shareholders, investors, partners, lenders, and regulators
Small and medium-sized enterprises (SMEs) represent more than 99 percent of enterprises in Europe, employing two-thirds of the workforce, and they made a significant contribution to the expansion of the EU-28 economy in recent years
The number of SMEs in the EU-28 increased by 13.8% between 2008 and 2017; the number of newborn SMEs markedly exceeds the actual increase in the SME population because of the high mortality rate of SMEs, especially among young enterprises (European Commission, 2018)
Summary
The correct measurement and prediction of firms’ credit risk and bankruptcy risk is a topic of great interest for many stakeholders: shareholders, investors, partners, lenders, and regulators. Small and medium-sized enterprises (SMEs) represent more than 99 percent of enterprises in Europe, employing two-thirds of the workforce, and they made a significant contribution to the expansion of the EU-28 economy in recent years. While SMEs are the backbone of the European economy, the Global Financial Crisis has substantially affected the SME sector in Europe. The number of SMEs in the EU-28 increased by 13.8% between 2008 and 2017; the number of newborn SMEs markedly exceeds the actual increase in the SME population because of the high mortality rate of SMEs, especially among young enterprises (European Commission, 2018). Bankruptcy continues to be a significant issue affecting them, which means that predicting SME bankruptcy is essential and even more critical after the crises
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