How Can Economic Stochasticity Promote or Prevent Corporate Defaults?

This study theoretically examines under what circumstances economic cycles advance or deter corporate defaults. We find 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. We further authenticate these theoretical inferences through Monte Carlo simulations. Our findings assert that moderate economic variability typically discourages corporate defaults. We conclude that in a perfect competition, economic waves can change the hierarchy of competitive advantages among rival firms and could help distressed firms to emerge