How can economic stochasticity promote or prevent corporate defaults?

Abstract

Purpose

The purpose of this paper is to theoretically examine under what circumstances economic cycles advance or deter corporate defaults.

Design/methodology/approach

The theoretical inferences are authenticated through Monte Carlo simulations.

Findings

It is found that an ongoing catastrophe dominates other macroeconomic conditions and forces corporate failures. In contrast, when a catastrophe is unlikely, a constant economy permits no‐defaults merely as an unstable equilibrium, yet a stochastic economy allows rival firms to remain operational within a stable general disequilibrium and under a wide range of economic conditions.

Research limitations/implications

This topic can only be theoretically examined.

Practical implications

The paper's findings assert that moderate economic variability typically discourages corporate defaults. These inferences convey high significance for regulators and policy makers.

Originality/value

The paper shows that in a perfect competition, economic waves can change the hierarchy of competitive advantages among rival firms and could help distressed firms to emerge.

Citation

Parnes, D. (2012), "How can economic stochasticity promote or prevent corporate defaults?", Managerial Finance, Vol. 38 No. 3, pp. 230-248. https://doi.org/10.1108/03074351211201406