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Firm failure processes and components of failure risk: An analysis of European bankrupt firms

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  • Lukason, Oliver
  • Laitinen, Erkki K.

Abstract

This paper aims to extract firm failure processes (FFPs) by using failure risk and rank the importance of failure risk contributors for different stages of FFPs. The dataset is composed of 1234 bankrupt firms from different European countries and three theoretically motivated FFPs are detected. For the dominant FFP found (73% of cases), failure risk becomes high very shortly before bankruptcy is declared. Annual and accumulated profitability are the most important failure risk contributors for these stages of all FFPs, where failure probability exceeds 50%. The obtained results provide important implications for bankruptcy prediction research and practice, especially in terms of identifying the most important financial predictors.

Suggested Citation

  • Lukason, Oliver & Laitinen, Erkki K., 2019. "Firm failure processes and components of failure risk: An analysis of European bankrupt firms," Journal of Business Research, Elsevier, vol. 98(C), pages 380-390.
  • Handle: RePEc:eee:jbrese:v:98:y:2019:i:c:p:380-390
    DOI: 10.1016/j.jbusres.2018.06.025
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    References listed on IDEAS

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    1. Erkki K. Laitinen & Oliver Lukason, 2014. "Do firm failure processes differ across countries: evidence from Finland and Estonia," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(5), pages 810-832, November.
    2. Amankwah-Amoah, Joseph, 2016. "An integrative process model of organisational failure," Journal of Business Research, Elsevier, vol. 69(9), pages 3388-3397.
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    7. N. Crutzen & D. Van Caillie, 2010. "Towards a Taxonomy of Explanatory Failure Patterns for Small Firms: A Quantitative Research Analysis," Review of Business and Economic Literature, Intersentia, vol. 55(4), pages 438-463, December.
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    14. Laitinen, Ek, 1993. "Financial predictors for different phases of the failure process," Omega, Elsevier, vol. 21(2), pages 215-228, March.
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    16. Stewart Thornhill & Raphael Amit, 2003. "Learning About Failure: Bankruptcy, Firm Age, and the Resource-Based View," Organization Science, INFORMS, vol. 14(5), pages 497-509, October.
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