The Value of Non-Financial Information in SME Risk Management

40 Pages Posted: 27 Dec 2008 Last revised: 12 Mar 2014

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

Wiserfunding

Nick Wilson

University of Leeds - Credit Management Research Centre; Leeds University Business School

Date Written: December 26, 2008

Abstract

Within the commercial client segment, small business lending is gradually becoming a major target for many banks. The new Basel Capital Accord has helped the financial sector to recognize small and medium sized enterprises (SMEs) as a client, distinct from the large corporate. Some argue that this client base should be treated like retail clients from a risk management point of view in order to lower capital requirements and realize efficiency and profitability gains. In this context, it is increasingly important to develop appropriate risk models for this large and potentially even larger portion of bank assets. So far, none of the few studies that have focused on developing credit risk models specifically for SMEs have included qualitative information as predictors of the company credit worthiness. For the first time, in this study we have available non-financial and 'event' data to supplement the limited accounting data which are often available for non-listed firms. We employ a sample consisting of over 5.8 million sets of accounts of unlisted firms of which over 66,000 failed during the period 2000-2007. We find that qualitative data relating to such variables as legal action by creditors to recover unpaid debts, company filing histories, comprehensive audit report/opinion data and firm specific characteristics make a significant contribution to increasing the default prediction power of risk models built specifically for SMEs.

Keywords: SME lending, Credit Risk Modeling, Bankruptcy, Small Business failure

JEL Classification: G33, G32, M13

Suggested Citation

Altman, Edward I. and Sabato, Gabriele and Wilson, Nicholas, The Value of Non-Financial Information in SME Risk Management (December 26, 2008). Available at SSRN: https://ssrn.com/abstract=1320612 or http://dx.doi.org/10.2139/ssrn.1320612

Edward I. Altman

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 (Contact Author)

Wiserfunding ( email )

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

HOME PAGE: http://www.wiserfunding.com

Nicholas Wilson

University of Leeds - Credit Management Research Centre ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Leeds University Business School ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

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