Yanru Lee

Job market paper

The Global Latent Risk Factor in Corporate Debt Distress: Frailty and Spillover Effects

This paper provides strong evidence of a common global latent risk (frailty) factor that impacts corporate debt distress risk worldwide by employing a dataset with international coverage of corporate default events. The global latent risk factor identifies substantial common variation among separately estimated dynamic latent risk (frailty) factors of firms at the country level. Estimations of country frailty factors control for observable firm fundamentals capturing systemic risk and omitted macroeconomic factors. Commonalities among country frailty factors highlight global systemic risk. Observable global factors and financing variables can only explain up to 25% of global frailty, indicating the vulnerability of global corporate credit markets to common latent systemic risk. The findings also detect cross-country corporate default risk spillovers, underscoring the international interconnectedness of corporate distress risk.