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Assessing the Impact of Credit Ratings and Economic Performance on Firm Default

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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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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2007/15.

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Date of creation: 13 Jul 2007
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Handle: RePEc:ssa:lemwps:2007/15

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Keywords: Default probability; Credit ratings; Firm growth dynamics; selection;

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Cited by:
  1. Giulio Bottazzi & Federico Tamagni, 2010. "Is Bigger Always Better ? The Effect of Size on Defaults," LEM Papers Series 2010/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Anna Maria Ferragina & Fernanda Mazzotta & Erol Taymaz & Kamil Yilmaz, 2013. "The Impact Of Fdi On Firm Survival And Employment: A Comparative Analysis For Turkey And Italy," ERSA conference papers ersa13p1211, European Regional Science Association.
  3. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2011. "Exporting under financial constraints: margins, switching dynamics and prices," LEM Papers Series 2011/24, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  4. G. Bottazzi & M. Grazzi, 2013. "Dynamics of productivity and cost of labor in Italian Manufacturing firms," Working Papers wp865, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Molinari, Massimo, 2013. "Joint analysis of the non-linear debt–growth nexus and cash-flow sensitivity: New evidence from Italy," Structural Change and Economic Dynamics, Elsevier, vol. 24(C), pages 34-44.
  6. Giorgio Barba Navaretti & Davide Castellani & Fabio Pieri, 2012. "Age and firm growth. Evidence from three European countries," Working Papers 1217, Department of Applied Economics II, Universidad de Valencia.
  7. Carlos Carreira & Filipe Silva, 2010. "No Deep Pockets: Some Stylized Empirical Results On Firms' Financial Constraints," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 731-753, 09.
  8. Ferragina, Anna & Pittiglio, Rosanna & Reganati, Filippo, 2012. "Multinational status and firm exit in the Italian manufacturing and service sectors," Structural Change and Economic Dynamics, Elsevier, vol. 23(4), pages 363-372.
  9. Adalgiso Amendola & Anna Maria Ferragina & Rosanna Pittiglio & Filippo Reganati, 2012. "Are exporters and multinational firms more resilient over a crisis? First evidence for manufacturing enterprises in Italy," Economics Bulletin, AccessEcon, vol. 32(3), pages 1914-1926.
  10. Carlo Milana & Leopoldo Nascia & Alessandro Zeli, 2013. "Decomposing multifactor productivity in Italy from 1998 to 2004: evidence from large firms and SMEs using DEA," Journal of Productivity Analysis, Springer, vol. 40(1), pages 99-109, August.
  11. Giovanni Dosi & Marco Grazzi & Chiara Tomasi & Alessandro Zeli, 2010. "Turbulence underneath the big calm? Exploring the micro-evidence behind the flat trend of manufacturing productivity in Italy," LEM Papers Series 2010/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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