Corporate failure prediction model for European SMEs

We propose a corporate failure prediction model that provides forecasting ability up to three years before the failure event. We use a longitudinal panel data over 2012-2019 retrieved from Orbis Europe formed of EU-based SMEs, analysed under different methodologies such as multiple discriminant analysis and logistic analysis. Our final insolvency prediction model includes EU-based SMEs failure determinants across all industries: cash ratio, contribution (per interest paid) ratio, solvency ratio, short-term financing, leverage, debt-assets ratio, and return on assets. Our model correctly predicts more than 70% of the observations three years before the event. The overall accuracy of the proposed model is about 82%. Our model results from a trade-off between interpretability and accuracy, targeting the interest of managers, analysts, investors, and remaining stakeholders allowing easy application and interpretation of the outcome.