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The Need for Specific Modelling of Small Enterprise Default Prediction: Empirical Evidence from Italian Small Manufacturing Firms

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  • Francesco Ciampi

Abstract

The existing literature has proved the effectiveness of financial ratios for company default prediction modelling. However, such researches rarely focus on small enterprises (SEs) as specific units of analysis. The aim of this paper is to demonstrate that SE default prediction should be modelled separately from that of large and medium-sized firms. In fact, a multivariate discriminant analysis was applied to a sample of 2,200 small manufacturing firms located in Central Italy and a SE default prediction model was developed based on a selected group of financial ratios and specifically constructed to capture the specificities of SEs’ risk profiles. Subsequently, the prediction accuracy rates obtained by this model were compared with those obtained from a second model based on a sample of 3,200 manufacturing firms situated in Central Italy which belong to all dimensional classes. The findings are the following- 1) evaluating the probability of default of SEs separately from that of larger firms improves prediction performance; 2) the predictive power of the discriminant function improves if it takes into account the different profiles of firms operating in different industry sectors; 3) this improvement is much greater for SEs compared to larger firms.

Suggested Citation

  • Francesco Ciampi, 2017. "The Need for Specific Modelling of Small Enterprise Default Prediction: Empirical Evidence from Italian Small Manufacturing Firms," International Journal of Business and Management, Canadian Center of Science and Education, vol. 12(12), pages 251-251, November.
    • Handle: RePEc:ibn:ijbmjn:v:12:y:2017:i:12:p:251
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    References listed on IDEAS

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    1. Crouhy, Michel & Galai, Dan & Mark, Robert, 2001. "Prototype risk rating system," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 47-95, January.
    2. Deakin, Eb, 1972. "Discriminant Analysis Of Predictors Of Business Failure," Journal of Accounting Research, Wiley Blackwell, vol. 10(1), pages 167-179.
    3. Ciampi, Francesco, 2015. "Corporate governance characteristics and default prediction modeling for small enterprises. An empirical analysis of Italian firms," Journal of Business Research, Elsevier, vol. 68(5), pages 1012-1025.
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    Cited by:

    1. Simone Poli & Marco Gatti, 2024. "The relevance of cash flow information in predicting corporate bankruptcy in Italian private companies," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2024(1), pages 179-202.

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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