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A Panel Analysis Of UK Industrial Company Failure

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Author Info
Natalia Isachenkova
John Hunter

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Abstract

We examine the failure determinants for large quoted UK industrials using a panel data set comprising 539 firms observed over the period 1988-93. The empirical design employs data from company accounts and is based on Chamberlain's conditional binomial logit model, which allows for unobservable, firm-specific, time-invariant factors associated with failure risk. We find a noticeable degree of heterogeneity across the sample companies. Our panel results show that, after controlling for unobservables, lower liquidity measured by the quick assets ratio, slower turnover proxied by the ratio of debtors turnover, and profitability were linked to the higher risk of insolvency in the analysis period. The findings appear to support the proposition that the current cash-flow considerations, rather than the future prospects of the firm, determined company failures over the 1990s recession.

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Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp228.

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Date of creation: Mar 2002
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Handle: RePEc:cbr:cbrwps:wp228

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Web page: http://www.cbr.cam.ac.uk/

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Related research
Keywords: Company Failure Risk; Unobserved Heterogeneity; Conditional Fixed Effects Logit Model;

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Find related papers by JEL classification:
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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  1. Young, Garry, 1995. "Company Liquidations, Interest Rates and Debt," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 63(0), pages 57-69, Suppl..
  2. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November. [Downloadable!] (restricted)
  3. Turner, Paul & Coutts, Andrew & Bowden, Sue, 1992. "The Effect of the Thatcher Government on Company Liquidations: An Econometric Study," Applied Economics, Taylor and Francis Journals, vol. 24(8), pages 935-43, August.
  4. Dickerson, Andrew P & Gibson, Heather D & Tsakalotos, Euclid, 1997. "The Impact of Acquisitions on Company Performance: Evidence from a Large Panel of UK Firms," Oxford Economic Papers, Oxford University Press, vol. 49(3), pages 344-61, July. [Downloadable!] (restricted)
  5. Butler, J S & Moffitt, Robert, 1982. "A Computationally Efficient Quadrature Procedure for the One-Factor Multinomial Probit Model," Econometrica, Econometric Society, vol. 50(3), pages 761-64, May. [Downloadable!] (restricted)
  6. Machin, Stephen & Van Reenen, John, 1993. "Profit Margins and the Business Cycle: Evidence from UK Manufacturing Firms," Journal of Industrial Economics, Blackwell Publishing, vol. 41(1), pages 29-50, March. [Downloadable!] (restricted)
  7. Geroski, P. A. & Gregg, P., 1996. "What makes firms vulnerable to recessionary pressures?," European Economic Review, Elsevier, vol. 40(3-5), pages 551-557, April. [Downloadable!] (restricted)
  8. Peel, MJ & Peel, DA & Pope, PF, 1986. "Predicting corporate failure-- Some results for the UK corporate sector," Omega, Elsevier, vol. 14(1), pages 5-12. [Downloadable!] (restricted)
  9. Goudie, A W & Meeks, G, 1991. "The Exchange Rate and Company Failure in a Macro-Micro Model of the UK Company Sector," Economic Journal, Royal Economic Society, vol. 101(406), pages 444-57, May. [Downloadable!] (restricted)
  10. Davidson, James E H, et al, 1978. "Econometric Modelling of the Aggregate Time-Series Relationship between Consumers' Expenditure and Income in the United Kingdom," Economic Journal, Royal Economic Society, vol. 88(352), pages 661-92, December. [Downloadable!] (restricted)
  11. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Blackwell Publishing, vol. 47(1), pages 225-38, January. [Downloadable!] (restricted)
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