A Parsimonious Default Prediction Model for Italian SMEs

In the light of the fundamental role played by small and medium enterprises (SMEs) in the economy of many countries, including in Italy, and of the specific treatment of this issue within the Basel II regulation, the aim of this paper is to build a default prediction model for the Italian SMEs. Specifically, we develop a logit model based on financial ratios: using the AIDA database, we focus the attention on a specific region in Italy, Emilia Romagna, where SMEs represent the majority of firms. We find that a parsimonious model based on only four explanatory variables fits well the default data and provides results consistent with structural models of the Merton type .

In the light of the fundamental role played by small and medium enterprises (SMEs) in the economy of many countries, including Italy, and of the specific treatment of this issue within the Basel II regulation, the aim of this paper is to build a default prediction model for the Italian SMEs. Specifically, this study develop a logit model based on financial ratios. Using the AIDA database, the authors focus the attention on a specific region in Italy, Emilia Romagna, where SMEs represent the majority of firms. The paper finds that a parsimonious model, based on only four explanatory variables, fits well the default data and provides results consistent with structural models of the Merton type.