Is Bigger Always Better ? The Effect Of Size On Defaults
Analyzing a large sample of Italian firms the authors find that the probability of default increases with size. This contrasts with the common observation, based on measures of exit from business registry data, that firms' death rate is inversely related to the scale of their operation and suggests a rethinking of the economic role of larger companies. They identify potential business failure with firm default. A default occurs when obligations are past due more than 90 days or when the creditor institution considers that the obligor is unlikely to repay its debt in full. Default events are both a signal of business troubles and a costly condition that should be in principle avoided.