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Predicting SMEs’ default risk: Evidence from bank-firm relationship data

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  • Modina, Michele
  • Pietrovito, Filomena
  • Gallucci, Carmen
  • Formisano, Vincenzo

Abstract

This paper uses a probit model on a unique dataset of 13,081 Italian firms and 111 co-operative banks involved in the lending process to provide empirical evidence suggesting that the use and violations of credit lines and long-term loan overruns predict one-year and two-year probability of default (PD). The analysis controls for balance sheet indicators and time varying bank characteristics, captured by bank-time fixed effects. When combined with accounting data, credit-related indicators obtained from private internal banking sources improve small and medium-sized enterprises’ (SMEs) default prediction. The marginal benefit of the bank-firm specific information is also assessed by comparing the default prediction accuracy of a model that incorporates accounting information with that of a full model including private information. In terms of heterogeneity, the association between the balance sheet indicators and data on bank-firm relationships and default probability can vary across sectors and geographies. This highlights the importance for banks of specific analysis to better assess risk at the firm level.

Suggested Citation

  • Modina, Michele & Pietrovito, Filomena & Gallucci, Carmen & Formisano, Vincenzo, 2023. "Predicting SMEs’ default risk: Evidence from bank-firm relationship data," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 254-268.
  • Handle: RePEc:eee:quaeco:v:89:y:2023:i:c:p:254-268
    DOI: 10.1016/j.qref.2023.04.008
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    More about this item

    Keywords

    Bank-firm relationship; Credit risk; Default prediction; Lending process; SMEs;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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