Credit rating system for small businesses using the K-S test to select an indicator system

Abstract

Purpose The purpose of this paper is to propose a system with the highest discriminatory power by selecting an indicator system based on the K–S test according to the unique circumstances of small enterprises. Design/methodology/approach The proposed method relies on calculating the K–S test statistical magnitude of D iteratively to reach a system with the maximum discriminatory power. Findings The empirical results, demonstrated using 3,045 small businesses from a Chinese bank, show that credit rating system should focus on the indicator system’s discriminatory power rather than a single indicator’s discriminatory power, because the interaction between indicators affects the discriminatory power of the system. Practical implications The proposed method creates a credit rating system with the highest discriminatory power, rather than its indicators, which is a more reasonable and novel approach to credit rating. Originality/value The approach is unique because the final system will have high discriminatory power and has excellent potential for decision support. The authors believe that this contribution is theoretically and practically relevant because credit rating for small business is especially difficult and complicated.