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Failure process and causes of company bankruptcy: a typology

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  • H. OOGHE

    ()

  • S. DE PRIJCKER

    ()

Abstract

This paper describes a typology of failure processes within companies. Based on case studies and considering companies’ ages and management characteristics, we discovered four types of failure processes. The first failure process describes the deterioration of unsuccessful start-up companies leaded by a management with a serious deficiency in managerial and industry- related experience. The second process reveals the collapse after a failing growth of ambitious early- stage companies. Those companies have, after a failed investment, insufficient financial means to adjust their way of doing business to the changes in the environment in order to prevent bankruptcy. Third, we describe the failure process of dazzled established companies, leaded by an overconfident management without a realistic view on the company’s financial situation. Lastly, the bankruptcy of apathetic companies, describes the gradual deterioration of an apathetic established company where management had lost touch with the changing environment. This typology gives new insight into the evolution of financial performance ratios during the years preceding bankruptcy. Furthermore, we found that there is a great difference in the presence and importance of specific causes of bankruptcy between the distinctive failure processes. Errors made by management, errors in corporate policy and changes in the gradual and immediate environments differ considerably between each of the four failure processes.

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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 06/388.

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Length: 38 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:rug:rugwps:06/388

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  1. H. Ooghe & N. Waeyaert, 2003. "Oorzaken van faling en falingspaden: Literatuuroverzicht en conceptueel verklaringsmodel," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/187, Ghent University, Faculty of Economics and Business Administration.
  2. Laitinen, Ek, 1993. "Financial predictors for different phases of the failure process," Omega, Elsevier, vol. 21(2), pages 215-228, March.
  3. Donald C. Hambrick & Richard A. D'Aveni, 1992. "Top Team Deterioration as Part of the Downward Spiral of Large Corporate Bankruptcies," Management Science, INFORMS, vol. 38(10), pages 1445-1466, October.
  4. Dimitras, A. I. & Slowinski, R. & Susmaga, R. & Zopounidis, C., 1999. "Business failure prediction using rough sets," European Journal of Operational Research, Elsevier, vol. 114(2), pages 263-280, April.
  5. S. Balcaen & H. Ooghe, 2004. "35 years of studies on business failure: an overview of the classical statistical methodologiesand their related problems," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/248, Ghent University, Faculty of Economics and Business Administration.
  6. Everett, Jim & Watson, John, 1998. " Small Business Failure and External Risk Factors," Small Business Economics, Springer, vol. 11(4), pages 371-90, December.
  7. Pompe, Paul P.M. & Bilderbeek, Jan, 2005. "The prediction of bankruptcy of small- and medium-sized industrial firms," Journal of Business Venturing, Elsevier, vol. 20(6), pages 847-868, November.
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Cited by:
  1. Jaroslaw Ropega, 2011. "The Reasons and Symptoms of Failure in SME," International Advances in Economic Research, Springer, vol. 17(4), pages 476-483, November.
  2. du Jardin, Philippe & Séverin, Eric, 2010. "Dynamic analysis of the business failure process: A study of bankruptcy trajectories," MPRA Paper 44379, University Library of Munich, Germany.
  3. Steven Liew Woon Choy & Jayaraman Munusamy & Shankar Chelliah & Ally Mandari, 2011. "Effects of Financial Distress Condition on the Company Performance: A Malaysian Perspective," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 85-99, August.
  4. Korol, Tomasz & Korodi, Adrian, 2011. "An Evaluation of Effectiveness of Fuzzy Logic Model in Predicting the Business Bankruptcy," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 92-107, September.

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