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Forecasting Distress in European SME Portfolios

Author

Listed:
  • Ferreira Filipe, Sara
  • Grammatikos, Theoharry
  • Michala, Dimitra

Abstract

In the European Union, small and medium sized enterprises (SMEs) represent 99% of all businesses and contribute to more than half of the total value-added. In this paper, we develop distress prediction models for SMEs using a dataset from eight European countries over the period 2000-2009. We examine idiosyncratic and systematic covariates and find that the first discriminate between healthy and distressed firms based on their relative level of risk, whereas the second move the overall distress rates. Moreover, SMEs across Europe are vulnerable to the same idiosyncratic factors but systematic factors vary in different regions. Also, micro SMEs are more vulnerable to these systematic factors compared to larger SMEs. The paper contributes to the literature in several ways. First, using a sample with many micro companies, it offers unique insights into the European small business sector. Second, it is the first paper to explore distress in a multi-country setting, allowing for regional comparisons and uncovering regional vulnerabilities. Third, by incorporating systematic dependencies, the models can capture changes in overall distress rates and comovements during economic cycles.

Suggested Citation

  • Ferreira Filipe, Sara & Grammatikos, Theoharry & Michala, Dimitra, 2014. "Forecasting Distress in European SME Portfolios," MPRA Paper 53572, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:53572
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    File URL: https://mpra.ub.uni-muenchen.de/53572/1/MPRA_paper_53572.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    credit risk; distress; forecasting; SMEs; discrete time hazard model; multi-period logit model; duration analysis;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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