Credit scoring of micro and small entrepreneurial firms in China

• Published in: International entrepreneurship and management journal Vol. 17; no. 1; pp. 29 - 43
• Main Authors: Wang, Chengbin, Fang, Kuangnan, Zheng, Chenlu, Xu, Hechao, Li, Zewei
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.03.2021; Springer Nature B.V
• Subjects: Business and Management; Credit scoring; Emerging Markets/Globalization; Entrepreneurship; Financial institutions; Management; Parameter estimation; Regression analysis; Small business; China; Logistic regression; Bi-level variable selection; Composite MCP; Credit scoring; Micro and small entrepreneurial firms (MSEFs)
• ISSN: 1554-7191; 1555-1938
• DOI: 10.1007/s11365-020-00685-8

It is difficult for micro and small entrepreneurial firms (MSEFs) to access external financing from formal financial institutions because financial institutions cannot obtain sufficient and reliable credit information about MSEFs. With the development of the internet and data collection technologies, more and more data can be accessed from different sources, and logistic regression model often suffers from bad performance. In this paper, we propose a credit scoring model using composite MCP logistic regression and firstly apply the proposed method to predict the probability of default of MSEFs in China. The proposed method can carry out parameter estimation and automatic bi-level selection of variables simultaneously with respect to the grouping structure of variables. Empirical results of MSEFs with complex grouping structure data have shown that the proposed method outperforms forward stepwise logistic regression, MCP logistic regression and group MCP logistic regression. In addition, we find that gross salary, tax paid, bank and injury insurance information of MSEFs are the most important factors to predict the probability of default.