Working Paper: CEPR ID: DP333
Authors: Christian Bordes; Jacques Melitz
Abstract: On the basis of quarterly data in 1977-87 and the use of the Engle-Granger method of co-integration, we find that real and financial factors, insolvency and illiquidity, are all important, separate influences on the defaults of French firms. We capture the effect of illiquidity by constructing stationary series to represent both cyclical departures of output from normal levels and deviations of financial prices from 'fundamentals'. We reflect the impact of financial factors by using debt-output ratios and real interest rates. These last two variables emerge as influences on business defaults in the long run and the short run, which we interpret to mean that business indebtedness affects both solvency and liquidity. Real wages and the terms of trade appear to affect solvency alone.
Keywords: bankruptcy; cointegration; financial market imperfections; business fluctuations; debt
JEL Codes: 131; 521
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cyclical departures of output from normal levels (E32) | frequency of defaults (G33) |
| deviations in financial prices from their fundamentals (G19) | frequency of defaults (G33) |
| illiquidity (G33) | failure of solvent businesses (G33) |
| relative factor prices (F16) | insolvency (G33) |
| real wages and terms of trade (F16) | long-term insolvency (G33) |
| debt levels (H63) | business failures (G33) |
| real price of credit (E51) | business failures (G33) |
| illiquidity (G33) | business failures (G33) |
| insolvency (G33) | business failures (G33) |
| percentage of new firms (M13) | frequency of failure (C41) |
| rising debt-output ratios (H63) | business defaults (G33) |