Predicting Private Company Failures in Italy Using Financial and Non-Financial Information

Abstract

The study assesses the use of non-financial information in predicting financial distress in private companies by developing credit risk models tailored to Italian private companies. The in-sample and out-of-sample prediction test results are indicative of the incremental predictive ability of the two new non-financial variables, that is, number of shareholders and number of subsidiaries, over accounting ratios and other widely used non-financial information, including firm age and industry dummies. To be more specific, number of shareholders and number of subsidiaries are negatively associated with private company failures, and the models augmented by the two non-financial variables improve forecasting performance from acceptable discrimination to excellent discrimination over one- to-three year time horizons.