Corporate failure: Bankruptcy prediction for Italian SMEs based on a longitudinal case study from 2000 to 2011

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Abstract

We investigate the case of Small-Medium Enterprises (SMEs) in Italy trying to understand if key performance indicators obtained from the financial statement are able to predict possible distress in a company with enough time to take some corrective actions. In order to test the hypotheses, a nonparametric supervised classification algorithm has been applied to a random sample of 100 non-listed SMEs, considering 50 companies that filed for bankruptcy during the period 2000-2011 and 50 companies still active on the market at the end of 2011. Results describe the Italian picture for SMEs during an economic crisis period. They show that, for the Italian case, it is possible to predict with enough time (4-5 years prior to failure) a distress situation in a firm through classification methods. Anyway, these methods are not predicting the health of a company but the possibility of the firm to access the credit system. The results are limited to the Italian SMEs context which is quite particular if compared with other countries in Europe. The dataset is limited in size but has been chosen to be representative of non-listed Italian companies.

Keywords: Financial Ratios, Financial Crisis, Bankruptcy, SMEs, Performance Indicators, Nonparametric Classifier, Supervised Classification

Authors’ individual contribution: Conceptualization – F.di D.; Methodology – L.N.; Writing – F.di D. and L.N.; Investigation – L.N.; Funding – F.di D.; Resources – F.di D. and L.N.; Supervision – L.N.

JEL Classification: C1, C4, M1, M4

Received: 21.01.2020
Accepted: 03.03.2020
Published online: 04.03.2020

How to cite this paper: di Donato, F., & Nieddu, L. (2020). Corporate failure: Bankruptcy prediction for Italian SMEs based on a longitudinal case study from 2000 to 2011. Corporate Ownership & Control, 17(3), 27-33. https://doi.org/10.22495/cocv17i3art2