On the determinants of corporate default in the EU-27 : Evidence from a large sample of companies

We analyze a large sample of companies operating in the EU-27 in the period 2007-2018 to gain new insights on the determinants of corporate defaults. The sample includes micro, small, medium and large enterprises, both active and defaulting. We document significant differences in the drivers of insolvency across firm size categories. Micro and small firms are significantly more vulnerable to sectoral shocks and to disruptions along the supply chain than larger companies. Instead, the default probability for all firms is significantly larger when companies experience in the previous year negative end-of-the year equity, that is a measure of prolonged financial distress. By exploiting institutional differences in judicial efficiency among EU-27 countries, we find financial distress is more likely to predict default in jurisdictions with more efficient insolvency procedures. Finally, we derive potential implications of our findings, especially with regard to the recent crises hitting European firms and the harmonisation of national insolvency regimes in the EU-27 towards most efficient legal practices, as foreseen under the Capital Markets Union Action Plan.