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.
Keywords
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
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited