some causes of business failure

What is it about?

The objective of the study is to examine the impact of both the number and types of causes of business failure on the failure risk as indicated by values of bankruptcy scores during the process of business decline. Causes of bankruptcy were obtained from court judgments for 70 Estonian manufacturing firms and classified into two taxonomies–the number of causes and the different types of causes of failure such as internal (different management deficiencies) or from factors external to the firm. Bankruptcy scores for the first and second pre-bankruptcy years were calculated using both Ohlson’s model and a local (Grünberg’s) bankruptcy prediction model. Independent samples median tests were applied to examine, whether different causes are associated with different failure risk. Findings indicate that multiple causes lead to a significantly higher bankruptcy risk than a single cause for the year prior to the declaration of bankruptcy. On the contrary, no significant effect of different types of failure causes was found on the risk of failure. Implications of the results for research and practice are discussed.

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Why is it important?

Results are based on the population of bankruptcies in one country.