An analysis of industrial company failure in the UK and Russia for the 1990s

This thesis was submitted for the degree of Doctor of Philosophy and awarded by Brunel University.This thesis provides an examination of the key determinants of industrial company failure in the UK and Russia, for the 1990s. For the UK, some new empirical evidence, presented for the 1990s recession period, is based on binary logit analyses of a cross-section and unbalanced panel of large quoted companies, using accounting-based indicators. Conventional for cross sectional studies empirical design of modelling the failure determinants separately for various risk-horizons, prior to the event of insolvency, is extended here by allowing for unanticipated changes in the nominal interest rate and in the real exchange rate, and also by controlling for the firm's age effect. We find that cross sectional models, conditioned on changes in overall economic conditions, dominate simpler models, utilising financial inputs alone, for comparisons of ex ante, out-of sample classificatory accuracy. Thus, the UK data suggest that for the years before and during the 1990s recession, shifts in the real exchange rate and rises in the nominal interest rate magnified dramatically the risk of failure of highly geared firms. The estimates from the fixed effects models indicate substantial unobserved heterogeneity across members of the panel and reveal that failing UK companies were less liquid, lacked profitability, and had declining net worth. For Russia, the evidence from binary logit is bootstrap-based and controlled by comparison with a similar random sample drawn for the UK over the recession years 1990-91. The Russian data uncover that, unlike in the UK, gearing and liquidity did not appear to explain enterprise liquidation in the mid-1990s, while lower profitability and smaller size were the key determinants of failure risk.Financial support from the ACE Tacis Programme, Contract T95-5127-S in 1996-98, and from the Department of Economics and Finance of Brunel University in 1999-2000 were used in this work

A Panel Analysis Of UK Industrial Company Failure

We examine the failure determinants for large quoted UK industrials using a panel data set comprising 539 firms observed over the period 1988-93. The empirical design employs data from company accounts and is based on Chamberlain's conditional binomial logit model, which allows for unobservable, firm-specific, time-invariant factors associated with failure risk. We find a noticeable degree of heterogeneity across the sample companies. Our panel results show that, after controlling for unobservables, lower liquidity measured by the quick assets ratio, slower turnover proxied by the ratio of debtors turnover, and profitability were linked to the higher risk of insolvency in the analysis period. The findings appear to support the proposition that the current cash-flow considerations, rather than the future prospects of the firm, determined company failures over the 1990s recession.Company Failure Risk, Unobserved Heterogeneity, Conditional Fixed Effects Logit Model

Ownership Characteristics and Access to Finance: Evidence from a Survey of Large Privatised Companies in Hungary and Poland

We examine financial constraints and forms of finance used for investment, by analysing survey data on 157 large privatised companies in Hungary and Poland for the period 1998 – 2000. The Bayesian analysis using Gibbs sampling is carried out to obtain inferences about the sample companies’ access to finance from a model for categorical outcome. By applying alternative measures of financial constraints we find that foreign companies, companies that are part of domestic industrial groups and enterprises with concentrated ownership are all less constrained in their access to finance. Moreover, we identify alternative modes of finance since different corporate control and past performance characteristics influence the sample firms’ choice of finance source. In particular, while being industry-specific, the access to domestic credit is positively associated with company size and past profitability. Industrial group members tend to favour bond issues as well as sells-offs of assets as appropriate types of finance for their investment programmes. Preferences for raising finance in the form of equity are associated with share concentration in a non-monotonic way, being most prevalent in those companies where the dominant owner holds 25%-49% of shares. Close links with a leading bank not only increase the possibility of bond issues but also appear to facilitate access to non-banking sources of funds, in particular, to finance supplied by industrial partners. Finally, reliance on state finance is less likely for the companies whose profiles resemble the case of unconstrained finance, namely, for companies with foreign partners, companies that are part of domestic industrial groups and companies with a strategic investor. Model implications also include that the use of state funds is less likely for Polish than for Hungarian companies.http://deepblue.lib.umich.edu/bitstream/2027.42/40052/3/wp666.pd

Ownership Characteristics and Access to Finance: Evidence from a Survey of Large Privatised Companies in Hungary and Poland

We examine financial constraints and forms of finance used for investment, by analysing survey data on 157 large privatised companies in Hungary and Poland for the period 1998 – 2000. The Bayesian analysis using Gibbs sampling is carried out to obtain inferences about the sample companies’ access to finance from a model for categorical outcome. By applying alternative measures of financial constraints we find that foreign companies, companies that are part of domestic industrial groups and enterprises with concentrated ownership are all less constrained in their access to finance. Moreover, we identify alternative modes of finance since different corporate control and past performance characteristics influence the sample firms’ choice of finance source. In particular, while being industry-specific, the access to domestic credit is positively associated with company size and past profitability. Industrial group members tend to favour bond issues as well as sells-offs of assets as appropriate types of finance for their investment programmes. Preferences for raising finance in the form of equity are associated with share concentration in a non-monotonic way, being most prevalent in those companies where the dominant owner holds 25%-49% of shares. Close links with a leading bank not only increase the possibility of bond issues but also appear to facilitate access to non-banking sources of funds, in particular, to finance supplied by industrial partners. Finally, reliance on state finance is less likely for the companies whose profiles resemble the case of unconstrained finance, namely, for companies with foreign partners, companies that are part of domestic industrial groups and companies with a strategic investor. Model implications also include that the use of state funds is less likely for Polish than for Hungarian companies.financial constraints, investment, enterprises, foreign ownership, industrial groups, concentrated ownership, leading bank, proportional-odds model, Bayesian updating.

Corporate Governance, Managers’ Independence, Exporting And Performance Of Firms In Transition Economies

Using data on 157 large companies in Poland and Hungary this paper employs a Bayesian structural equation modeling to examine interrelationships between corporate governance, managers’ independence from owners in terms of strategic decision-making, exporting and performance. It is found that managers’ independence is positively associated with firms’ financial performance and exporting. In turn, the extent of managers’ independence is negatively associated with ownership concentration, but positively associated with the percentage of foreign directors on the firm’s board. We interpret these results as an indication that (i) concentrated owners tend to constrain managerial autonomy at the cost of the firm’s internationalization and performance, (ii) board participation of foreign stakeholders, on the other hand, enhances the firm’s export orientation and performance by encouraging executives’ decision-making autonomy.corporate governance, strategic independence, exporting, performance

A panel analysis of UK industrial company failure

We examine the failure determinants for large quoted UK industrials using a panel data set comprising 539 firms observed over the period 1988-93. The empirical design employs data from company accounts and is based on Chamberlain’s conditional binomial logit model, which allows for unobservable, firm-specific, time-invariant factors associated with failure risk. We find a noticeable degree of heterogeneity across the sample companies. Our panel results show that, after controlling for unobservables, lower liquidity measured by the quick assets ratio, slower turnover proxied by the ratio of debtors turnover, and profitability were linked to the higher risk of insolvency in the analysis period. The findings appear to support the proposition that the current cash-flow considerations, rather than the future prospects of the firm, determined company failures over the 1990s recession

An analysis of industrial company failure in the UK and Russia for the 1990s

This thesis provides an examination of the key determinants of industrial company failure in the UK and Russia, for the 1990s. For the UK, some new empirical evidence, presented for the 1990s recession period, is based on binary logit analyses of a cross-section and unbalanced panel of large quoted companies, using accounting-based indicators. Conventional for cross sectional studies empirical design of modelling the failure determinants separately for various risk-horizons, prior to the event of insolvency, is extended here by allowing for unanticipated changes in the nominal interest rate and in the real exchange rate, and also by controlling for the firm's age effect. We find that cross sectional models, conditioned on changes in overall economic conditions, dominate simpler models, utilising financial inputs alone, for comparisons of ex ante, out-of sample classificatory accuracy. Thus, the UK data suggest that for the years before and during the 1990s recession, shifts in the real exchange rate and rises in the nominal interest rate magnified dramatically the risk of failure of highly geared firms. The estimates from the fixed effects models indicate substantial unobserved heterogeneity across members of the panel and reveal that failing UK companies were less liquid, lacked profitability, and had declining net worth. For Russia, the evidence from binary logit is bootstrap-based and controlled by comparison with a similar random sample drawn for the UK over the recession years 1990-91. The Russian data uncover that, unlike in the UK, gearing and liquidity did not appear to explain enterprise liquidation in the mid-1990s, while lower profitability and smaller size were the key determinants of failure risk