Firms That Age Well: Life Cycles and Default Risk

13 Pages Posted: 18 Feb 2021 Last revised: 14 Jan 2022

See all articles by Attila Balogh

Attila Balogh

University of Melbourne - Department of Finance

Jiri Svec

The University of Sydney - Discipline of Finance

Danika J. Wright

The University of Sydney - Discipline of Finance

Date Written: February 2, 2021

Abstract

The evolution of firms is not necessarily uniform. Exploring how this affects credit risk models, we find that firm life cycle provides additional explanatory power not captured by age. Firm age has an ambiguous effect on default risk and its impact during periods of high volatility is insignificant. Unobserved firm heterogeneity is an important determinant of credit default swap spreads and, when accounted for, riskier growth firms command a lower spread compared to mature firms that commonly benefit from the lowest spreads. Firms that age well by maintaining a growth profile are rewarded with lower cost of capital.

Keywords: Credit default swap, Credit risk, Firm life cycle

JEL Classification: G12, G32

Suggested Citation

Balogh, Attila and Svec, Jiri and Wright, Danika J., Firms That Age Well: Life Cycles and Default Risk (February 2, 2021). Available at SSRN: https://ssrn.com/abstract=3777702 or http://dx.doi.org/10.2139/ssrn.3777702

Attila Balogh (Contact Author)

University of Melbourne - Department of Finance ( email )

198 Berkeley Street
Carlton, VIC 3010
Australia

Jiri Svec

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9036 6241 (Phone)

Danika J. Wright

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

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