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Financial and economic determinants of firm default

Author

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  • Giulio Bottazzi
  • Marco Grazzi
  • Angelo Secchi
  • Federico Tamagni

Abstract

The study of firms' default has attracted wide interest among both practitioners and scholars. However, attention has often been limited to a relatively small set of financial variables. In this work, we try to increase the scope of analysis extending the investigation to other possible determinants of default. In particular, we rely on credit ratings to summarize firms' financial conditions, and we address the potential predictive power of a set of economic dimensions -- size, growth, profitability and productivity -- which industrial economics suggest to be meaningful determinants of survival. We present novel results based on a large Italian dataset reporting credit ratings for all the firms in the sample. As far as financial conditions and default are concerned, we find that the firms displaying the worst credit ratings are quite turbulent, but also exhibit non-negligible chances to recover. Moreover, the analysis of the distribution of firms' economic performance reveals that profitability stands up as the only relevant economic variable telling apart defaulting firms from `surviving' ones, at different time distance to default. Finally, probit and logit estimations of default probabilities, testing for the simultaneous effect of economic and financial dimensions, suggest that growth, in addition to credit ratings, significantly affects the likelihood of default, albeit in a positive (and as such unexpected) way in the manufacturing industry.
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  • Giulio Bottazzi & Marco Grazzi & Angelo Secchi & Federico Tamagni, 2011. "Financial and economic determinants of firm default," Journal of Evolutionary Economics, Springer, vol. 21(3), pages 373-406, August.
    • Handle: RePEc:spr:joevec:v:21:y:2011:i:3:p:373-406
    DOI: 10.1007/s00191-011-0224-6
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    More about this item

    Keywords

    Firm default; Selection and growth dynamics; Stochastic equality; Bootstrap probit regressions; Distance to Default; Credit ratings; C14; C25; D20; G30; L11;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D20 - Microeconomics - - Production and Organizations - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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