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Is Bigger Always Better ? The Effect of Size on Defaults

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  • Giulio Bottazzi
  • Federico Tamagni

Abstract

Exploiting a large database of Italian manufacturing firms we investigate the relationships between default rate and firm size. Default events, defined as conditions of actual or likely insolvency, are a signal of deep business troubles. They are unanticipated, costly and dangerous for the firm as well as for the economy, and should be in principle avoided. Our evidence, based on data provided by a large Italian banking group, reveals that the default probability of firms increases with their size. This finding contrasts with typical results on exit events based on business registries data, and suggests to revise the common wisdom that sees the core of the industry as a safe place and its members as most valuable economic assets.

Suggested Citation

  • 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.
    • Handle: RePEc:ssa:lemwps:2010/07
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    References listed on IDEAS

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    More about this item

    Keywords

    firm default and exit; firm size; bootstrap probit regressions.;
    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
    • 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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