Assessing viability of Finnish reorganization and bankruptcy firms

Abstract

The objective of the Finnish Bankruptcy Act (FBA) is to give the assets of a non-viable firm to the bankrupted estate and divide them by the creditors of the firm (liquidation). However, the objective of the Finnish Company Reorganization Act (FCRA) is to recover a temporally financially distressed firm that is viable. In these acts, the viability concept is used to refer to a firm that is able to pay its financial obligations in the future. FBA is not efficient if a viable firm is filed for bankruptcy and liquidated. In the same way, FCRA is not efficient if a non-viable firm is filed for reorganization. The purpose of this study is to assess viability of Finnish firms filed for reorganization and bankruptcy. Logistic regression analysis is used to extract two measures for viability. The first measure is based on financial statement information only while the second one takes account of both financial and non-financial information. The estimation sample comprises data from 43636 viable and 98 non-viable firms. The resulted measures are used to assess viability of a sample of firms filed for reorganization and bankruptcy in 2004. In general, the results show that the greater part of firms filed for reorganization is non-viable whereas many of bankruptcy firms are viable. This reflects an occurrence of filtering failure.