Moral hazard index for credit risk to SMEs

Abstract

This article proposes a methodology to calculate the effect of moral hazard on short term credit (working capital) to small and medium-sized enterprises (SMEs). The methodology incorporates four categories of moral hazard ratio defined in a previous study, which are employed to determine probability of default based on a logit model. To this end, a novel Colombian database is used to calculate a moral hazard index that considers the percentages of the odds ratios of the moral hazard variables for positive coefficients on the probabilities of default. The empirical analysis result in an index measuring the impact of moral hazard on odds ratio mainly based on underinvestment moral hazard category in the sample of analyzed companies for the period ranged from 2007 to 2014. • Moral Hazard Index for Credit Risk is proposed to measure the effect of moral hazard. • The original index is based on the analysis of moral hazard ratios on credit default. • Underinvestment category is the most important moral hazard variable in our sample.