Financial Bankruptcy across European Countries

The aim of this research is to describe corporate bankruptcy across Western European countries and propose a simple and reliable default prediction model for private manufacturing firms in six EU member states. Using firm-level accounting data taken from the Orbis-Europe Database, published by Bureau Van Dijk, we first propose a simple Indebtedness index which considers the multifaceted aspects of debt and allows to make interesting comparison among firms, countries, industrial sectors and over time. Second, we estimate a logit model, based on both the first step computed Indebtedness score and additional non-financial firms¡¯ characteristics, which allows to compute firms¡¯ predicted probabilities of default in each country. The empirical findings show that the Indebtedness score is statistically significant in explaining bankruptcy and it enters all the regressions with the highest coefficient and level of significance. However, while the indebtedness score is a valuable bankruptcy predictor for Italy, Germany, Portugal and Spain, which are bank-based economies, it is relatively less important for France and UK, being countries more strongly oriented toward the financial market. The overall evidence highlights a good reliability of our multi-country model for the prediction of corporate bankruptcies across Europe.