Modelling credit risk for innovative SMEs: the role of innovation measures

Small-medium enterprises (SMEs) encounter financial constraints when they try to obtain credit from banks. These constraints are particularly severe for innovative SMEs. Thus, developing models for innovative SMEs that provide reliable estimates of their probabilities of default (PD) is important because the PDs can also serve as ratings. We examine the role of innovative assets such as patents in credit risk modelling due to their signaling value. Specifically, we add to a logit model two innovation-related variables in order to account for both the dimension and the value of the patent portfolio. Based on a unique data set of innovative SMEs with default years of 2005 to 2008, we show that, although the value of the patent portfolio always reduces the PD, its dimension reduces the firm’s riskiness only if coupled with an appropriate equity level.