How can economic stochasticity promote or prevent corporate defaults?

Purpose - The purpose of this paper is to theoretically examine under what circumstances economic cycles advance or deter corporate defaults. Design/methodology/approach - The theoretical inferences are authenticated through Monte Carlo simulations. Findings - It is found 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. Research limitations/implications - This topic can only be theoretically examined. Practical implications - The paper's findings assert that moderate economic variability typically discourages corporate defaults. These inferences convey high significance for regulators and policy makers. Originality/value - The paper shows that in a perfect competition, economic waves can change the hierarchy of competitive advantages among rival firms and could help distressed firms to emerge.