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The probability of default and risk-rating class is studied for 9,390 Italian SMEs using a set of ordinary and yearly financial statements (not abbreviated) from 2007 to 2010. After constructing the rating model and then listing companies within ten classes of risk, this paper aims to support the resolution of an intricate topic: the identification of 713 firms included in the median classes of rating designed to evolve to better classes, and firms that, instead, will move closer to high risk of default. In this way, the results of our research could help to identify, for similar firms in 2007, two different destinies after three years (in 2010). The most interesting result emerging from our analysis is related to the presence of a positive relationship between some financial ratios (capital structure and fewer inventories) and the probability of notching-up. The overall evidence is supportive of the hypothesis that the benefits gain up by profitability ratios cannot give to the firms a solid class of rating guaranteed for the future.

Medium Risk Companies: The Probability of Notching-Up (Note 1)