Forecasting Distress in European SME Portfolios

Ferreira Filipe, Sara and Grammatikos, Theoharry and Michala, Dimitra (2014): Forecasting Distress in European SME Portfolios.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: credit risk, distress, forecasting, SMEs, discrete time hazard model, multi-period logit model, duration analysis
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C41 - Duration Analysis ; Optimal Timing Strategies; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation

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