Modelling credit risk for innovative firms: the role of innovation measures

Financial constraints encountered by small-medium enterprises (SME) are particularly severe for innovative firms, which, in the EU, cannot rely on a sufficiently developed venture capital industry and have to depend on debt capital. It is thus important to develop models which, in consideration of the specific features of innovative SMEs, provide a reliable estimate of their probability of default (PD) that can also serve as a rating of the innovative firm. Based on the signaling value of innovation-related assets such as patents, this paper shows the role of innovative assets in credit risk modeling. Specifically, we include in a logit model two innovation-related variables in order to account for both the dimension and the value of the patent portfolio. Based on a unique dataset of innovative SMEs with default years 2006-2008 we show that, while the value of the patent portfolio always reduces the PD, its dimension increases the firm’s riskiness unless coupled with an appropriate equity level.