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Macroeconomic determinants of corporate failures: evidence from the UK

  • Jia Liu
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    Previous studies on the relationship between macroeconomic aggregates and business failures have been restricted to the description of the short-run relationships among the variables. This paper uses an error-correction model (ECM) to investigate the determinants of UK corporate failures by modelling the short-run and long-run behaviours of corporate failure rates in relation to macroeconomic phenomena over the period 1966-1999. The findings indicate that failure rates are associated with interest rates, credit, profits, price, and corporate birth rates both in the short run and in the long run. Of these macroeconomic variables, interest rate appears to be an important factor influencing failure rates and can be used as a feasible policy instrument to reduce the incidence of corporate failures. The impact of the Insolvency Act 1986 has also been examined and its mitigating effect on corporate failures has been identified.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000233168
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    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 36 (2004)
    Issue (Month): 9 ()
    Pages: 939-945

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    Handle: RePEc:taf:applec:v:36:y:2004:i:9:p:939-945
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    1. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
    2. Platt, Harlan D. & Platt, Marjorie B., 1994. "Business cycle effects on state corporate failure rates," Journal of Economics and Business, Elsevier, vol. 46(2), pages 113-127, May.
    3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    4. Wadhwani, Sushil B, 1986. "Inflation, Bankruptcy, Default Premia and the Stock Market," Economic Journal, Royal Economic Society, vol. 96(381), pages 120-38, March.
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