Evaluating the Risk of Insolvency

The paper analyzes the risk of bankruptcy of an Italian manufacturing firms data set from the Marche region that has the greater share of persons employed in industry as a proportion of those employed in the non-financial business economy in the country. This evidence is more important if we consider that in Europe only 17% of regions reaches more than 40% of its employed in industry. Moreover, the considered firms are excellent in terms of their size in relation to turnover and employment and are representative examples of what in Italy is known as “fourth capitalism”. Alternative default probability predictive methods have been tested on the accounting data from these statistical units. Specifically, after testing the adequacy of Altman’s Z-score model, we attempt to solve its well known limit due to the consideration of the same number of defaulting and non-defaulting firms in the sample, up till the selection of new explicative variables related to enterprise’s bankruptcy risk and an alternative fixed effects panel data approach to estimate the model parameters. So, we progressively obtain a considerable improvement in the overall forecasting error.