Discriminant Analysis and Firms’ Bankruptcy: Evidence from European SMEs

Abstract

Using two research methodologies - the Altman’s z-score discriminant analysis, in the revised version referring to non-listed firms, and the Bayesian approach Diagnostic Distribution - the paper investigates the possibility of discriminating between healthy and bankrupt European SMEs based on financial statements and using a Bayesian discriminant model inspired by Altman’s model. It also aims to verify whether the geographic location of European SMEs influences the ability to discriminate between healthy versus bankrupt firms. The work finds a significant homogeneity regarding the capability of the new discriminant models to classify healthy and bankrupt SMEs within the Euro Area and in different geographic locations. The empirical observations confirm that financial statements are a relevant channel by which SMEs communicate information to the financial system, even if they cannot provide all the information that allows for healthy and bankrupt SMEs to be distinguished.