Using a large sample of accounting data for non-financial companies in France, this paper studies the interactions between macroeconomic shocks and companies' financial fragility. We consider links in both directions, namely whether firms' bankruptcies are affected by macroeconomic variables, and whether bankruptcies determine the business cycle. We estimate forecasting equations for firms' bankruptcy using Shumway's (2001) approach and study the joint dynamics of bankruptcies and macroeconomic variables within an exogenous VAR type model estimated at the sector level. We find evidence of reciprocal links between the bankruptcy rate and the output gap and highlight significant "second round effects" of shocks to the output gap on bankruptcies. We show how taking into account the dynamic transmission of macroeconomic shocks matters in stress testing exercises.
Catherine Bruneau, Olivier de Bandt and Widad El Amri
Classification JEL : G33, E32, D21, C41
Keywords : financial fragility, macroeconomic shocks, corporate bankruptcies, multi-period Logit model, stress testing, second round effects
Updated on: 06/12/2018 10:59