A default prediction model for Italian SMEs: the relevance of the capital structure

Small and Medium Enterprises (SMEs) play a fundamental role in the economy of many countries, including Italy. The simplicity of the financial structure of Italian SMEs, relying mostly on bank loans, makes them riskier than their larger counterparts and this induces banks to develop default prediction models specifically addressing the management of SMEs’ credit relationship. Building on this framework, this article aims to analyse the determinants of the default probability of a sample of 9208 Italian limited liabilities SMEs in a time frame of three years, over the period 2006 to 2010. Specifically, this article adopts a logistic regression model estimated on a database provided by the Centrale Rischi Finanziari (CRIF), an Italian credit rating agency. The results show that, among the observable financial and economic characteristics of the firms, the capital structure (both in terms of internal and external funds and in terms of the source of external financing) and interest expenses are more relevant than economic variables as determinants of SMEs’ default.