Analysing business failure processes

Abstract

The purpose of this article is on detecting failure trajectories based on financial variables. We use a dynamic methodology to analyse financial failure. We wish to do this because our goal is to analyse how the economic and financial indicators can predict the risk of failure in a sample of companies. Using a sample of 132 companies which were declared bankrupt or dissolved, we depict the trajectories behaviour of the companies on their path to failure. We analyse these trajectories to show if there are empirical evidences of the different processes of bankruptcy. We also study if the warning signs of failure are different in each of these trajectories. In conclusion, we will see that there are different failure trajectories. We can use these different trajectories to identify the indicators that warn of the risks of failure of the companies in the sample. Finally, we prove that the warning signs of failure do not occur in the same way or at the same time.