A Structural form Default Prediction Model for SMEs, Evidence from the Dutch Market

Frieda Rikkers () and Andre E. Thibeault
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Frieda Rikkers: Tilburg University, Netherlands
Andre E. Thibeault: Vlerick Leuven Gent Management School, Belgium

Multinational Finance Journal, 2009, vol. 13, issue 3-4, 229-264

Abstract: The objective of this research is to develop a structural form probability of default model for small and medium-sized enterprises, dealing with the methodological issues which arise in the modelling of small commercial loan portfolios. Other motivations are to provide an extensive overview of the characteristics of SMEs, and to provide a list of characteristics for an SME PD model, e.g. time and cost efficiency, broad applicability, limited data requirements, and powerful in predicting default. The structural form model is developed and tested on a unique dataset of private firm’s bank loans of a Dutch bank. The results are promising; the model output differs significantly between defaulted and non-defaulted firms. The structural form model can be used on its own, or as an additional variable in a credit risk model. A second PD model is developed using logistic regression with a number of financial ratios, including the structural form measure. This variable is significant in default prediction of SMEs and has some additional predictive power, next to the popular financial ratios. Overall, the results indicate that the structural form model is a good indicator for default of SMEs.

Keywords: SME; probability of default; structural form credit risk model; Basel II (search for similar items in EconPapers)
JEL-codes: C51 C52 G21 G28 G33 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:mfj:journl:v:13:y:2009:i:3-4:p:229-264

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