The predictive limit of Beta in the corporate default risk

This study investigates the relationship between market beta and corporate default risk, measured using Altman's Z-Score. The objective is to determine whether beta - commonly used as a proxy for systemic risk - can serve as a reliable predictor of financial fragility at the firm level. The analysis is based on a panel of 510 observations of Italian companies over the period 2019–2023. Several econometric approaches are employed, including panel data models (Pooled OLS, Fixed Effects, First Differences), parametric and non-parametric Generalised Additive Models (GAM), and LASSO regression for automatic variable selection. The independent variables include beta and a set of accounting indicators (ROE, leverage, interest coverage, net margin, asset turnover, current ratio). The Z-Score is used as a continuous dependent variable to capture default risk. Across all model specifications, beta is consistently found to be statistically insignificant. Its contribution remains null or negligible even in nonlinear and penalised models. In contrast, all accounting variables display strong, stable, and significant relationships with the Z-Score, underscoring their superior predictive power. The findings indicate that market beta is not a useful metric for estimating corporate default risk. This suggests a clear empirical separation between systemic risk and firm-level financial fragility. The evidence reinforces the reliability of accounting-based indicators in assessing default probability and highlights the limitations of using beta outside the theoretical scope of the CAPM.