The potential of top management characteristics for small enterprise default prediction modelling

The aim of this study is to verify the potential of top management characteristics for small enterprise (SE) default prediction modelling. Logistic regression was applied to a sample of 423 Italian SEs, as defined in the Base Capital Accords (firms with a turnover below 5 million Euro) in order to develop a SE default prediction model based on both financial ratios and SE top management characteristics. The predictive power of this model was then compared to that of a second model whose predictive variables were exclusively represented by balance sheet financial ratios. The main findings are: i) managerial characteristics significantly improve the SE default prediction accuracy rates; ii) the smaller is a firm the higher is the increase in prediction accuracy that can be obtained by using managerial characteristics as default predictors; iii) SEs belonging to different size groups need to be treated with different prediction models; iv) SE management’s over-confidence in its ability to control the outcome of all events, especially external events, reduces a firm’s capacity to survive.