• The editor in charge of this paper was Fabio Canova.

  • Acknowledgments: We would like to thank Rikard Kindell, who co-authored the working paper version of this paper on a shorter data sample, for outstanding contributions to this project. Discussions with and suggestions from Franklin Allen, Ed Altman, Mitch Berlin, Kerstin Bernoth, Mark Carey, Ines Drumond, Xavier Freixas, Bob Hunt, Wenli Li, Leonard Nakamura, Dragon Tang, Cees Ullersma, and Kostas Tsatsaronis have been very helpful in improving upon earlier drafts. We are also grateful for comments from seminar participants at the Bank of Austria, the Bank of Hungary, the Einaudi Institute for Economics and Finance, the Bank of England, the Bank of Finland, the Federal Reserve Bank of Philadelphia, the Federal Reserve Bank of New York, Uppsala University, EARIE, the C.R.E.D.I.T. 2008 conference, the EEA-ESEM meetings in Budapest (2008) and Barcelona (2009), the 2009 BIS Research task force workshop, the 2008 ASSA meetings, the DNB conference on Financial Stability and Financial Crises, and the BIS. Erica Reisman, Erik von Schedvin, and Ingvar Strid provided outstanding research assistance. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Executive Board of Sveriges Riksbank, the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.


This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990–2009, a period which includes a full-scale banking crisis, we find strong evidence for a substantial and stable impact from aggregate fluctuations on business defaults. A standard logit model with financial ratios augmented with macroeconomic factors can account surprisingly well for the outburst in business defaults during the banking crisis, as well as the subsequent fluctuations in default frequencies. Moreover, the effects of macroeconomic variables differ across industries in an economically intuitive way. Out-of-sample evaluations show that our approach is superior to models that exclude macro information and standard well-fitting time-series models. Our analysis shows that firm-specific factors are useful in ranking firms’ relative riskiness, but that macroeconomic factors are necessary to understand fluctuations in the absolute risk level.