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

Abstract

Accounting ratios come from financial information included in financial statements that companies are obliged to produce for external stakeholders and to be compliant with the law and fiscal rules. They can have a prediction role for companies’ bankruptcy (Barnes, 1987). Bankruptcy can be defined as the lack of resources to repay the obligations of a company as they come due (Boardman, Bartley, & Ratliff, 1981). Many studies have been devoted to the use of accounting data in order to predict corporates bankruptcy, starting from Beaver’s (1966), and Altman’s (1968) research. Beaver used univariate statistics in the US market while Altman found out that this kind of analysis is not good enough for evaluating companies’ potential failure. For this reason, he introduced the Multiple Discriminant Analysis (MDA) in order to predict the possibility of a company to fail. Anyway, this analysis does not consider the evolution of financial ratios over time. Ohlson (1980), to solve this issue, used information about the company’s performance at a different time before failure. In the US context, Altman’s model was used by many researchers to predict big companies’ failure (Blum, 1974; Ohlson, 1980). The survival of a firm is linked to economic and financial equilibrium in the medium-long term, where economic balance refers to the capability to generate revenues higher than costs and to produce a profit for shareholders’ Abstract