Debt and Extinction of Firms

The fact that a firm comes to the end of its activity through bankruptcy may be traumatic for its creditors. A firm which stops trading and voluntarily pays off its debts will rarely represent a significant economic problem. In this article we shall endeavour to validate the theoretical results which, in general, show that the higher the debt the greater the probability of exit through bankruptcy and lower the probability of voluntary liquidation. Using data from the Central Credit Register and staff payrolls, we show that all things being equal, a firm with double the amount of debt in comparison to another will have a 25 per cent higher annual probability of exit through bankruptcy, whereas the probability, in the case of exit through voluntary liquidation, will fall to 5 per cent. These results have evident implications for the pricing of loans to non-financial corporations in debt, owing to the fact that the higher the probabilities of exit, the higher the credit spreads.