No. 226 Firm Default and Aggregate Fluctuations

by Tor Jacobson, Rikard Kindell, Jesper Lindé and Kasper Roszbach

19 September 2008

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

C35, C41, C52, E44, G21, G33.