Firm Default and Aggregate Fluctuations

Abstract

This paper studies the relation between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. Using a logit approach on a panel data set for all incorporated Swedish businesses over 1990-2002, we find strong evidence for a substantial and stable impact of aggregate fluctuations. Macroeffects differ across industries in an economically intuitive way. Out-of-sample evaluations show our approach is superior to both models that exclude macro information and best fitting naive forecasting models. While firm-specific factors are useful in ranking firms' relative riskiness, macroeconomic factors capture fluctuations in the absolute risk level.

Keywords: Default, default-risk model, business cycles, aggregate fluctuations, microdata, logit, firm-specific variables, macroeconomic variables

JEL Classification: C35, C41, C52, E44, G21, G33