11,401 research outputs found
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Aggregate economy risk and company failure: An examination of UK quoted firms in the early 1990s
Considerable attention has been directed in the recent finance and economics literature to issues concerning
the effects on company failure risk of changes in the macroeconomic environment. This paper examines the
accounting ratio-based and macroeconomic determinants of insolvency exit of UK large industrials during
the early 1990s with a view to improve understanding of company failure risk. Failure determinants are
revealed from estimates based on a cross-section of 369 quoted firms, which is followed by an assessment
of predictive performance based on a series of time-to-failure-specific logit functions, as is typical in the
literature. Within the traditional for cross-sectional data studies framework, a more complete model of
failure risk is developed by adding to a set of traditional financial statement-based inputs, the two variables
capturing aggregate economy risk - one-year lagged, unanticipated changes in the nominal interest rate and
in the real exchange rate. Alternative estimates of prediction error are obtained, first, by analytically
adjusting the apparent error rate for the downward bias and, second, by generating holdout predictions.
More complete, augmented with the two macroeconomic variables models demonstrate improved out-ofestimation-
sample classificatory accuracy at risk horizons ranging from one to four years prior to failure,
with the results being quite robust across a wide range of cutoff probability values, for both failing and nonfailed
firms.
Although in terms of the individual ratio significance and overall predictive accuracy, the findings of the
present study may not be directly comparable with the evidence from prior research due to differing data
sets and model specifications, the results are intuitively appealing. First, the results affirm the important
explanatory role of liquidity, gearing, and profitability in the company failure process. Second, the findings
for the failure probability appear to demonstrate that shocks from unanticipated changes in interest and
exchange rates may matter as much as the underlying changes in firm-specific characteristics of liquidity,
gearing, and profitability. Obtained empirical determinants suggest that during the 1990s recession, shifts
in the real exchange rate and rises in the nominal interest rate, were associated with a higher propensity of
industrial company to exit via insolvency, thus indicating links to a loss in competitiveness and to the
effects of high gearing. The results provide policy implications for reducing the company sector
vulnerability to financial distress and failure while highlighting that changes in macroeconomic conditions
should be an important ingredient of possible extensions of company failure prediction models
A Review and Bibliography of Early Warning Models
This note is intended to share some observations regarding a non-exhaustive collection of the early warning literature from 1971 to 2011. Evolution of the interest in early warning models, methodological spectrum of studies and coverage of economic variables are briefly discussed in addition to providing a bibliography.Early warning systems, bibliometric analysis
Recommended from our members
Aggregate economy risk and company failure: An examination of UK quoted firms
Considerable attention has been directed in the recent finance and economics literature to issues concerning
the effects on company failure risk of changes in the macroeconomic environment. This paper examines the
accounting ratio-based and macroeconomic determinants of insolvency exit of UK large industrials during
the early 1990s with a view to improve understanding of company failure risk. Failure determinants are
revealed from estimates based on a cross-section of 369 quoted firms, which is followed by an assessment
of predictive performance based on a series of time-to-failure-specific logit functions, as is typical in the
literature. Within the traditional for cross-sectional data studies framework, a more complete model of
failure risk is developed by adding to a set of traditional financial statement-based inputs, the two variables
capturing aggregate economy risk - one-year lagged, unanticipated changes in the nominal interest rate and
in the real exchange rate. Alternative estimates of prediction error are obtained, first, by analytically
adjusting the apparent error rate for the downward bias and, second, by generating holdout predictions.
More complete, augmented with the two macroeconomic variables models demonstrate improved out-ofestimation-
sample classificatory accuracy at risk horizons ranging from one to four years prior to failure,
with the results being quite robust across a wide range of cut-off probability values, for both failing and
non-failed firms.
Although in terms of the individual ratio significance and overall predictive accuracy, the findings of the
present study may not be directly comparable with the evidence from prior research due to differing data
sets and model specifications, the results are intuitively appealing. First, the results affirm the important
explanatory role of liquidity, gearing, and profitability in the company failure process. Second, the findings
for the failure probability appear to demonstrate that shocks from unanticipated changes in interest and
exchange rates may matter as much as the underlying changes in firm-specific characteristics of liquidity,
gearing, and profitability. Obtained empirical determinants suggest that during the 1990s recession, shifts
in the real exchange rate and rises in the nominal interest rate, were associated with a higher propensity of
industrial company to exit via insolvency, thus indicating links to a loss in competitiveness and to the
effects of high gearing. The results provide policy implications for reducing the company sector
vulnerability to financial distress and failure while highlighting that changes in macroeconomic conditions
should be an important ingredient of possible extensions of company failure prediction models
Estimating the effects of oil price shockson the Kazakh economy
This paper explores the role of oil for the Kazakh economy. In order to assess thedegree of volatility the oil price features, it, firstly, discusses the literature on oil price behaviour. Secondly, it analyzes the effect of oil price declines on key macroeconomicvariables such as real GDP, inflation and real exchange rates using vectorautoregressive (VAR) models. In this respect, the paper deviates from a large number of papers on oil price effects as it considers a transition rather than a developed economy and an oil exporting rather than an oil importing country. The key findings to emerge from this paper are, first, that the price of oil is influenced by a large number of factors, which results in a considerable degree of volatility. Secondly, all variables considered in theVAR model exhibit a strong negative significant reaction on oil price declines, and, thirdly, a standard linear VAR model is appropriate for capturing the Kazakh oil-macro relationship.Oil price, VAR-Models, oil exporting economy.
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