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

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.

Stakeholders and Long-Term Sustainability of SMEs. Who Really Matters in Crisis Contexts, and When

“…Finally, regarding H6 (all stakeholders), which suggests that, in terms of the likelihood of SME failure, stakeholder salience changes over the period leading up to business failure, our findings are in line with previous business failures studies [38]. Therefore, H6 (all stakeholders) is confirmed.…”

“…This is consistent with the model of business failure that found working capital to be relevant to the survival of small firms [14,15]. However, our study found that the relative significance of each stakeholder depends on the stage of the business failure process, supporting some authors' claims for business failure to be viewed as a process rather than as a specific point in time [38]. This perspective is consistent with the view that critical relationships have an impact on long-term sustainability.…”

“…Third, our results contribute to the literature on business failure processes [38,39] by providing empirical evidence that variables related to the operating cycle (mainly linked to the cost of the workforce, supplier debt, and customer payment collection period) can predict the risk of SME failure. These variables are followed by financial issues; since the firm cannot meet its current obligations, other creditors (financial institutions) become relevant.…”

“…Moreover, when analyzing business failure, previous research has been focused on identifying variables that allow firms to be classified as either healthy or in financial distress, at various specific points in time (one, two, or three years before failure) [32,33]. In this respect, recent studies do not consider business failure as occurring at a single point in time; rather they distinguish between different processes of failure [34][35][36][37][38][39]. Despite the contribution of these studies to a longer-term perspective of the business failure process, most of them have focused on validating the seminal model of business failure prediction.…”

Risk of Bankruptcy, Its Determinants and Models

“…However, the main determinant of bankruptcy is insolvency (Cisko and Klieštik 2013). Some studies on risk of bankruptcy consider negative profitability as a prerequisite for bankruptcy (Scott 1981;Lukason and Laitinen 2018). Bankruptcy can be caused by both liquidity and profitability, as well as other financial areas of business.…”