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Company accounts based modelling of business failures and the implications for financial stability

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  • Philip Bunn
  • Victoria Redwood

Abstract

In this paper the determinants of failure among individual UK public and private companies are examined, over the period from 1991 to 2001. Using information on profitability, interest cover, capital gearing, liquidity, company size, industry, whether a firm is a subsidiary and overall economic conditions, it is possible to construct estimates of the probability of failure for individual companies. These are used to calculate each company's debt at risk: the probability of failure multiplied by its outstanding debt. By summing the firm-level debt at risk over all companies it is possible to produce an aggregate measure of financial risk that takes account of how debt is distributed across individual companies. Aggregate debt at risk, as a percentage of total debt, has fallen from the levels reached in the early 1990s and has remained relatively stable despite the build-up in corporate debt since then.

Suggested Citation

  • Philip Bunn & Victoria Redwood, 2003. "Company accounts based modelling of business failures and the implications for financial stability," Bank of England working papers 210, Bank of England.
  • Handle: RePEc:boe:boeewp:210
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp210.pdf
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    References listed on IDEAS

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    1. M. Tudela & G. Young, 2005. "A Merton-Model Approach To Assessing The Default Risk Of Uk Public Companies," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(06), pages 737-761.
    2. 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 444-457, May.
    3. Lennox, Clive, 1999. "Identifying failing companies: a re-evaluation of the logit, probit and DA approaches," Journal of Economics and Business, Elsevier, vol. 51(4), pages 347-364, July.
    4. Geroski,Paul A. & Gregg,Paul, 1997. "Coping with Recession," Cambridge Books, Cambridge University Press, number 9780521622769, October.
    5. Bhattacharje,e A. & C.Higson & S.Holly & P.Kattuman, 2002. "Macro Economic Instability and Business Exit: Determinants of Failures and Acquisitions of Large UK Firms," Royal Economic Society Annual Conference 2002 27, Royal Economic Society.
    6. repec:sae:niesru:v:139:y::i:1:p:88-94 is not listed on IDEAS
    7. Young, Garry, 1995. "Company Liquidations, Interest Rates and Debt," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(0), pages 57-69, Suppl..
    8. Wadhwani, Sushil B, 1986. "Inflation, Bankruptcy, Default Premia and the Stock Market," Economic Journal, Royal Economic Society, vol. 96(381), pages 120-138, March.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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