Cyclicality and Firm Size in Private Firm Defaults

Thais Lærkholm Jensen, David Lando, Mamdouh Medhat

Research output: Contribution to journalJournal articleResearchpeer-review

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.
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.
LanguageEnglish
JournalInternational Journal of Central Banking
Volume13
Issue number4
Pages97-145
StatePublished - 2017

Cite this

Jensen, Thais Lærkholm ; Lando, David ; Medhat, Mamdouh. / Cyclicality and Firm Size in Private Firm Defaults. In: International Journal of Central Banking. 2017 ; Vol. 13, No. 4. pp. 97-145
@article{bcbbd818fa204c5182a05422fd9923b4,
title = "Cyclicality and Firm Size in Private Firm Defaults",
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.",
author = "Jensen, {Thais L{\ae}rkholm} and David Lando and Mamdouh Medhat",
year = "2017",
language = "English",
volume = "13",
pages = "97--145",
journal = "International Journal of Central Banking",
issn = "1815-4654",
publisher = "Association of the International Journal of Central Banking",
number = "4",

}

Cyclicality and Firm Size in Private Firm Defaults. / Jensen, Thais Lærkholm; Lando, David; Medhat, Mamdouh.

In: International Journal of Central Banking, Vol. 13, No. 4, 2017, p. 97-145.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Cyclicality and Firm Size in Private Firm Defaults

AU - Jensen,Thais Lærkholm

AU - Lando,David

AU - Medhat,Mamdouh

PY - 2017

Y1 - 2017

N2 - 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.

AB - 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.

M3 - Journal article

VL - 13

SP - 97

EP - 145

JO - International Journal of Central Banking

T2 - International Journal of Central Banking

JF - International Journal of Central Banking

SN - 1815-4654

IS - 4

ER -