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Cyclicality and Firm Size in Private Firm Defaults

Author

Listed:
  • Thais Lærkholm Jensen

    (University of Copenhagen and Danmarks Nationalbank)

  • David Lando

    (Copenhagen Business School)

  • Mamdouh Medhat

    (Cass Business School – City, University of London)

Abstract

The Basel II/III and CRD IV Accords reduce capital charges on bank loans to smaller firms by assuming that the default probabilities of smaller firms are less sensitive to macroeconomic cycles. We test this assumption in a default intensity framework using a large sample of bank loans to private Danish firms. We find that controlling only for size, the default probabilities of small firms are, in fact, less cyclical than the default probabilities of large firms. However, accounting for firm characteristics other than size, we find that the default probabilities of small firms are equally cyclical or even more cyclical than the default probabilities of large firms. These results hold using a multiplicative Cox model as well as an additive Aalen model with time-varying coefficients.

Suggested Citation

  • Thais Lærkholm Jensen & David Lando & Mamdouh Medhat, 2017. "Cyclicality and Firm Size in Private Firm Defaults," International Journal of Central Banking, International Journal of Central Banking, vol. 13(4), pages 97-145, December.
    • Handle: RePEc:ijc:ijcjou:y:2017:q:4:a:4
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    Cited by:

    1. Frank Ranganai Matenda & Mabutho Sibanda & Eriyoti Chikodza & Victor Gumbo, 2022. "Bankruptcy prediction for private firms in developing economies: a scoping review and guidance for future research," Management Review Quarterly, Springer, vol. 72(4), pages 927-966, December.
    2. Aysha Sami Latif & Attaullah Shah, 2021. "The Impact of Quality of Accounting Information on Cost of Capital: Insight from an Emerging Economy," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(4), pages 292-307, April.
    3. Frank Ranganai Matenda & Mabutho Sibanda, 2022. "Determinants of Default Probability for Audited and Unaudited SMEs under Stressed Conditions in Zimbabwe," Economies, MDPI, vol. 10(11), pages 1-28, November.

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