Credit in the Economy: Small Business Default Correlation and Firms' Co-movements

Small businesses play crucial part in every developed economy. They employ about 50% of the workforce and are the engine of innovation. For this reason policy makers and regulators support financing small businesses’ operations to allow them to grow and show its potential. Through a series of studies about small business credit risk, we show that small business credit risk is predominantly related to firm characteristics rather than to economy or industry wide conditions. We find evidence that a distress in a customer industry is linked to higher credit risk among the small business suppliers and that a trade credit is an important channel transmitting distress from one firm to another.