Corporate governance characteristics and default prediction modeling for small enterprises. An empirical analysis of Italian firms

The aim of this paper is to analyze how the relationship between corporate governance mechanisms and business failure changes in small enterprises (SEs) compared to larger firms. Logistic regression was applied to a sample of 934 Italian SEs, and a SE default prediction model built based on both financial ratios and corporate governance characteristics. The accuracy rates obtained by this model were then compared to those from a second model, based on the same sample of firms, which used only financial ratios as predictive variables. The findings are the following: i) CEO duality, owner concentration, and a reduced number of outside directors on the board (no more than 50%) are significantly and negatively correlated with small company default and ii) corporate governance variables significantly improve the SE default prediction accuracy rates.