Default rates for U.S. mid-cap companies were less volatile and lower than those of large-cap companies during high-stress periods, according to new research from Fitch Ratings.

The study, conducted by Fitch’s Credit Market Research group in collaboration with Dr. Edward Altman, Director of New York University’s Credit and Debt Markets Research, looks at the default behavior of mid- and large-cap companies during stress and nonstress periods and examines the volatility of default and loss rates for the two categories over a credit cycle.

The study covers a five-year sample period, 2000-2004, which includes two high default years, two average default years, and one relatively low default year and finds that while the average default rate of large-cap companies is only slightly greater than that of mid-caps in the sample, the rate differences are sensitive to whether the overall annual default rate on high yield bonds is relatively low or high.

In high default periods, such as 2001-2002, default rates of large-cap companies are significantly greater than those of mid-caps. In addition, when default rates are low overall, mid-cap companies appear to have higher default rates, it says. The overall volatility of default rates was found to be greater for large-cap companies, it adds.

“The study offers empirical evidence that smaller speculative grade companies may be less risky than larger companies during high stress periods and more risky during benign periods” said Mariarosa Verde, managing director, Fitch Credit Market Research.

Mid-cap companies were defined as firms with up to either US$250 million or US$500 million in public bonds outstanding.