Integrating Industrial and Financial Analysis into a Rating Methodology for Corporate Risk Detection: The Case of the Vicenza Manufacturing Firms

Abstract

The need to innovate rating methodology toward an integrated approach is crucial in the Italian financial contest. At present, the banking system and the economic actors are unable to create effective and efficient information flows to react to crisis. Banks weakness derives from the adopted rating models which are mainly based on credit tendencies. They produce cyclical effects on credit availability and are not able to anticipate anti-cyclical firms’ trends. The separation between financial and industrial analysis might be a driver a such an inefficient flow of information. Thus, the aim of the paper is to show a framework for an original rating methodology derived from the integration of industrial and financial analysis, in order to identify best performers in crisis scenarios (i.e. anti-cyclically). Industrial analysis is based on firm heterogeneity approaches to measure three dimension of analysis: innovation, internationalization and growth. Financial analysis focuses on operational return and risks measures and develops an integrated classification of firms using standardized XBRL financial data. Further integration of the two methodologies is used to create the effective set of information needed for an original rating system based on certainty equivalent model. The case of the very competitive manufacturing firms in Vicenza was considered. Results suggest the efficacy of the proposed methodology in order to identify clusters of best performers firms in crisis scenarios and the validation test on post crisis timeframe confirm the anti-cyclical capacity of integrated rating methodology.

Keywords: Corporate risks, Rating, Firm behavior, Firm performance

JEL Classification: G30, D21, D92, L25, L26