Small Enterprise Default Prediction Modeling through Artificial Neural Networks: An Empirical Analysis of Italian Small Enterprises

Having accurate default prediction models is vital for both banks and enterprises, especially small enterprises (SEs). SEs represent a vital part in the economy of every country but are also typically more informationally opaque than large corporations. Therefore these models should be easily adaptable to suit SE characteristics. Our study applies artificial neural networks (ANNs) to a sample of over 7,000 Italian SEs. Results show that: i) ANNs can make a better contribution to SE credit-risk evaluation; and ii) when the model is separately calculated according to size, geographical area and business sector, ANNs prediction accuracy is markedly higher for the smallest-sized firms and for firms operating in Central Italy.