10/2007 Aaro Hazak ja Kadri Männasoo. Indicators of corporate default - an EU based empirical study

Working Papers of Eesti Pank. No 10/2007

The present paper contributes to the research on the indicators that provide a warning of company failure by employing micro and macro variables within a framework of survival analysis using a sample of 0.4 million companies from the European Union (EU). The sensitivity of the results is checked using two complementary event definitions - bankruptcy and negative equity. Our results imply that the baseline hazard of a default is a U-shaped function of the time the company has survived. High leverage and a low return on assets appear to be strong predictors of failure. Macroeconomic variables give mixed evidence for old and new member states as well as for the two default definitions.
JEL Code: G33, C41
Key words: corporate default, bankruptcy, survival analysis

* Aaro Hazak works for PricewaterhouseCoopers. Kadri Männasoo worked for Eesti Pank during the implementation of the research project. Any errors remain the responsibility of the authors and no organisation has no responsibility for the views and information communicated in this paper.
We are grateful to Professor Michael Funke, Professor Karsten Staehr, Aurelius Dabušinskas, Martti Randveer and Tairi Rõõm for their valuable comments and suggestions.

Authors' e-mail addresses: aaro.hazak [at] ee.pwc.com, kadri.mannasoo [at] hansa.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.


1. Introduction
2. Literature
3. Methodology
3.1. Definitions of default
3.2. Company financial indicators
3.3. Company structural indicators
3.4. Macroeconomic indicators
3.5. Survival analysis model
4. Data
5. Results
6. Conclusions
Appendix 1. Company financial indicators
Appendix 2. Company type classification and sample coverage

Indicators of Corporate Default - An EU Based Empirical Study, Working Papers of Eesti Pank No 10/2007 (PDF*)

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