Forecasting Distress in European SME Portfolios

Sara Ferreira Filipe, Theoharry Grammatikos and Dimitra Michala

MPRA Paper from University Library of Munich, Germany

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.

Keywords: credit risk; distress; forecasting; SMEs; discrete time hazard model; multi-period logit model; duration analysis (search for similar items in EconPapers)
JEL-codes: C13 C41 C53 G33 (search for similar items in EconPapers)
Date: 2014-02-01
New Economics Papers: this item is included in nep-dcm, nep-ent, nep-eur, nep-for, nep-sbm and nep-sog
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Forecasting distress in European SME portfolios (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:53572

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