Modelling Credit Risk for SMEs: Evidence from the U.S. Market

26 Pages Posted: 17 Aug 2007

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Gabriele Sabato



Considering the fundamental role played by small and medium sized enterprises (SMEs) in the economy of many countries and the considerable attention placed on SMEs in the new Basel Capital Accord, we develop a distress prediction model specifically for the SME sector and to analyse its effectiveness compared to a generic corporate model. The behaviour of financial measures for SMEs is analysed and the most significant variables in predicting the entities' credit worthiness are selected in order to construct a default prediction model. Using a logit regression technique on panel data of over 2,000 U.S. firms (with sales less than $65 million) over the period 1994-2002, we develop a one-year default prediction model. This model has an out-of-sample prediction power which is almost 30 per cent higher than a generic corporate model. An associated objective is to observe our model's ability to lower bank capital requirements considering the new Basel Capital Accord's rules for SMEs.

Suggested Citation

Altman, Edward I. and Sabato, Gabriele, Modelling Credit Risk for SMEs: Evidence from the U.S. Market. Abacus, Vol. 43, No. 3, pp. 332-357, September 2007, Available at SSRN: or

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Gabriele Sabato

Wiserfunding ( email )

Grand Union House
20 Kentish Town Road
London, NW1 9NX
United Kingdom


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