Ethics or economics: what drives strategic default?

We study the determinants of strategic default using survey data on Vietnamese small and medium-sized enterprises that allow for a direct distinction between strategic and economically driven loan payment defaults. We document that approximately 18% of reported defaults are strategic, accounting for a substantial share of overall credit risk. Strategic default is strongly and negatively associated with explicit, observable elements of ethical leadership, but not with the firm’s financial condition. These findings are robust across a range of robustness checks. Our results highlight the role of ethical dimensions in loan reimbursement and suggest that models of debt contracts based solely on financial incentives may understate the importance of non-pecuniary considerations in sustaining credit relationships.