Abstract
The paper aims to jointly combine three different categories of variables (financial ratios, corporate governance data and bank-firm information) to predict SMEs’ default. To this end, a merged longitudinal predictive model was applied to a sample of 973 Italian SMEs that are clients of 36 different co-operative banks. The collected data (for a total of 23 variables included in the model) relate to the years 2012–2014. The main findings reveal the high predictive power of leverage ratio, CEO tenure and ownership concentration, and the number of loans overdue for more than 180 days in the previous 12 months.
Highlights
The issue of default-prediction models for small and medium-sized enterprises (SMEs) has attracted the interest of academics since the 1970s (Edmister, 1972), with renewed attention starting from the 1990s due to the Basel Capital Accords
The results suggest that the degree of indebtedness is significantly and positively related to default risk, suggesting that because more indebted SMEs have a higher probability of failing, choices about firms’ financial structure cannot be undervalued
We found that CEO tenure is negatively related to SME defaults
Summary
The issue of default-prediction models for small and medium-sized enterprises (SMEs) has attracted the interest of academics since the 1970s (Edmister, 1972), with renewed attention starting from the 1990s due to the Basel Capital Accords. The development of default-prediction models for SMEs has become a specific and autonomous stream of finance literature, and this is still the case today This field of interest has become topical given the current COVID19 pandemic, which is making the limits of traditional rating models (mainly based on financial ratios and accounting data) even more marked when applied to SME default prediction. The global COVID-19 crisis has been impacting on the financial health of the majority of SMEs, forcing them to base their chances of survival on turnaround plans which, by their very nature, significantly reduce the predictive value of past accounting data on which financial ratios are based (Ciampi et al, 2021). This crisis is expected to have an amplification effect on the tendency of SMEs to resort to unorthodox accounting behaviors with the aim of postponing the emergence of economic and/or financial imbalances (Ciampi, 2018), thereby increasing the timeframe within which a firm’s financial weaknesses are reflected inits financial ratios level
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