Financial and Economic Determinants of Firm Default

by Giulio Bottazzi of Scuola Superiore Sant'Anna,
Marco Grazzi of Scuola Superiore Sant'Anna,
Angelo Secchi of the Università di Pisa, and
Federico Tamagni of Scuola Superiore Sant'Anna

October 19, 2009

Abstract: This paper investigates the relevance of financial and economic variables as determinants of firm defaults. Our analysis is not limited to publicly traded companies but extends to a large sample of limited liability firms. We consider size, growth, profitability and productivity together with a standard set of financial indicators. Non parametric tests allow to asses to what extent defaulting firms differ from the non-defaulting group. Bootstrap probit regressions confirm that economic variables play both a long and short term effect. Our findings are robust with respect to the inclusion of Distance to Default and risk ratings among the regressors.

JEL Classification: C14, C25, D20, G30, L11.

Keywords: firm default, financial indicators, selection and growth dynamics, kernel densities, stochastic equality, bootstrap probit regressions, Distance to Default.

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