Cyclicality and Firm-size in Private Firm Defaults

International Journal of Central Banking (Forthcoming)

40 Pages Posted: 19 Nov 2016

See all articles by Thais Laerkholm Jensen

Thais Laerkholm Jensen

Independent

David Lando

Copenhagen Business School

Mamdouh Medhat

Dimensional Fund Advisors; City University London - Sir John Cass Business School

Date Written: July 8, 2016

Abstract

The Basel II/III and CRD-IV Accords reduce capital charges on bank loans to smaller firms by assuming that the default probabilities of smaller firms are less sensitive to macroeconomic cycles. We test this assumption in a default intensity framework using a large sample of bank loans to private Danish firms. We find that controlling only for size, the default probabilities of small firms are, in fact, less cyclical than the default probabilities of large firms. However, accounting for firm characteristics other than size, we find that the default probabilities of small firms are equally cyclical or even more cyclical than the default probabilities of large firms. These results hold using a multiplicative Cox model as well as an additive Aalen model with time-varying coefficients.

Keywords: Capital charges, SME, Default risk, Macroeconomic cycles

JEL Classification: G33, G21, G28, C41

Suggested Citation

Jensen, Thais Laerkholm and Lando, David and Medhat, Mamdouh, Cyclicality and Firm-size in Private Firm Defaults (July 8, 2016). International Journal of Central Banking (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2871550

Thais Laerkholm Jensen

Independent ( email )

David Lando

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45 3815 3600 (Fax)

Mamdouh Medhat (Contact Author)

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

HOME PAGE: http://https://sites.google.com/site/mamdouhmedhatresearch/home

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://https://sites.google.com/site/mamdouhmedhatresearch/

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