2010/07 LEM Working Paper Series

Is Bigger Always Better ? The Effect of Size on Defaults

Giulio Bottazzi, Federico Tamagni
firm default and exit, firm size, bootstrap probit regressions.

  JEL Classifications
C14, C25, G30, L11

Exploiting a large database of Italian manufacturing firms we investigate the relationships between default rate and firm size. Default events, defined as conditions of actual or likely insolvency, are a signal of deep business troubles. They are unanticipated, costly and dangerous for the firm as well as for the economy, and should be in principle avoided. Our evidence, based on data provided by a large Italian banking group, reveals that the default probability of firms increases with their size. This finding contrasts with typical results on exit events based on business registries data, and suggests to revise the common wisdom that sees the core of the industry as a safe place and its members as most valuable economic assets.

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