Estimating growth of SMEs using a logit model: Evidence from manufacturing companies in Italy

What is it about?

In this paper, an effort has been put to develop a model for estimating growth based on logit regression (logit) and implemented the model to Italian manufacturing companies. Our data set consists of 8232 SMEs of Italy. To estimate the growth of the firm an innovative approach that considers annual statements issued the year before the accelerated growth has been considered as the effective estimators of firm growth. The result of the logit showed that return on asset, log (cash flow) and log (Inventory) positively affect in estimating the growth of the high growth firm whereas working capital turnover times negatively affects in estimating the growth of the firm. The discriminant power of the model using Receiver Operating Characteristics curve shows 72.35%, which means the model is fair in terms of estimating the growth.

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Why is it important?

Evaluating and estimating the growth of firms is important because it helps for the Investors, Investment banks, and Venture capital firms in order to select the best potential firms for their investment in order to earn higher profits. So, using the financial ratios to evaluate the growth of companies has been also considered by credit providers, stockholders, and financial analysts. There are forms or aspects of growth that our data did not capture. For example, the present idea can be implemented in one industry rather than many industries which may be the consistent approach, the present data involves only the Italian firms where the same idea can be implemented across different markets and industries as well. Further, future study can also focus individually on younger firms or large scale firms.