Efficiency and corporate bankruptcy predictions

This study investigates the role of technical efficiency in predicting the probability of default of a sample of Italian SMEs in the period 2007-2009. This specific period is of particular interest because it is centered on the beginning of the Global Financial Crisis. We argue that technical efficiency allows for a forward-looking perspective and can contribute to shed more light on the reasons behind the default of many Italian SMEs in the particular period considered. The technical efficiency is estimated with a stochastic frontier approach and the efficiency ratio is used as independent variable, along with several financial ratios. Consistently with the literature, the results suggest that efficiency is a good predictor when the financial ratios are also considered. Several robustness checks support the preliminary findings.