How to Rate the Financial Performance of Private Companies? A Tailored Integrated Rating Methodology Applied to North-Eastern Italian Districts

This paper contributes to solving the puzzle of assessing financial performance private/unlisted companies. The inner characteristics these companies make adoption traditional best practices in estimating risk premia difficult or impossible. Moreover, lack market data and comparable information biases perception corporate generates misallocation credit fundings (both quantities pricing). Hence, this paper, we develop an Integrated Rating Methodology (IRM) estimate a more efficient “return-to-risk” measure. Our IRM is rooted seminal “certainty equivalent” model as developed by Lintner 1965, but modify it using shortfall approach, then compute “confident that compliant with Fischer Black’s zero-beta well Basel agreements. An empirical application approach conducted sample 13,583 non-financial SMEs north-east regions Italy, where there evidence inefficient bank financing. We back-test our rating during period 2007–2014, which encompasses both Great Financial Crisis European sovereign debt crisis. results depict clear crowding-out effect allocations when compare scoring measure actual raising ability cost capital relating firms. find 36% are underfunded, even if they have superior score, while 27% them funded without merit. Interestingly, last figure line average non-performing loan ratio provided official Italian statistics from 2015 2020. Therefore, conclude methodology promising may be better at financing small private (including start-ups) than internal banking models. These initial will drive forthcoming research towards creating 2.0.