Abstract

This study aims to identify a number of qualitative and quantitative elements that affect financial distress costs between Italian and German small and medium-sized enterprises (SMEs). We propose a model that interprets “expected costs” as the product between “expected financial distress likelihood” and “total amount of financial distress costs due to insolvency”. The model is estimated using panel data methodology on samples from two European countries (Italy and Germany). The results indicate that expected costs depend on the use of derivative financial instruments, use of intangible assets and the relation with local banks (small local banks rather than large banking groups); in particular, the results obtained from cross‐country comparison shows that German SMEs (or Mittelstand companies) have characteristics that limit financial distress costs. It should be emphasized that the present work limits its field of investigation to a few variables without fully addressing other elements of uncertainty which may adversely affect the expected cost of financial distress in SMEs. This work will be useful to stimulate debate on policies to support SMEs. The originality of this study is to focus on determinants of financial distress in SMEs using panel data methodology. Key words: Cross‐country comparison, derivative instrument, expected cost, financial distress, small and medium-sized enterprises (SME).

Highlights

  • This study is finalized to identify a number of qualitative and quantitative elements that affect financial distress costs of small and medium-sized enterprises (SMEs)

  • The estimate of the variables LnFDL, INTAN, LOCALBINTAN and DER is useful in building a “matrix” capable of suggesting, at country level, policies for Italian SMEs for tackling the crisis as well as to mitigate the costs of exit from the market (Figure 1)

  • As evidenced by the results of this study research, expected financial distress costs are intimately linked to a number of variables considered influential in this analysis: the intangible assets, the close relationship with local banks and, the use of derivative instruments commonly used for risk management

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Summary

Introduction

This study is finalized to identify a number of qualitative and quantitative elements that affect financial distress costs of small and medium-sized enterprises (SMEs). The survey model analyzes SME samples from two European countries, Italy and Germany, whose financial and entrepreneurial systems show significant differences. Data were extracted from BvD databases, and panel data methodology was used to control potential endogeneity and unobservable heterogeneity. The results obtained applying survey model revealed that parameters are significant and with the expected signs.

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