Abstract
The majority of research papers dealing with corporate failure and insolvency in transition countries use a combination of financial ratios in investigating corporate failures, i.e., the microeconomic approach. By relying solely on the microeconomic approach, it is not possible to completely capture the complexity of business operations. In recent years, there has been a growing interest in exploring the predictive power of macroeconomic variables in forecasting insolvencies. As the macroeconomic approach has been applied mainly in the analysis of developed economies, this article investigates the influence of macroeconomic variables on aggregate corporate insolvency in Croatia, using the vector error-correction model (VECM) for the period 2000–2011. The results have shown a long-run dynamic connection between the corporate insolvency rate and the rate of unemployment while corporate credits, long-term interest rates and industrial production have a short-term effect on the corporate insolvency rate.
Highlights
Recent developments in Croatia and the rest of the world again proved that, in times of crisis, the majority of companies, regardless of their sector, ownership or organisational structure, face negative rates of return and/or problems of illiquidity
As the macroeconomic approach has been applied mainly in the analysis of developed economies, this article investigates the influence of macroeconomic variables on aggregate corporate insolvency in Croatia, using the vector error-correction model (VECM) for the period 2000–2011
The results have shown a long-run dynamic connection between the corporate insolvency rate and the rate of unemployment while corporate credits, long-term interest rates and industrial production have a short-term effect on the corporate insolvency rate
Summary
Recent developments in Croatia and the rest of the world again proved that, in times of crisis, the majority of companies, regardless of their sector, ownership or organisational structure, face negative rates of return and/or problems of illiquidity. This results in insufficient funds to cover current liabilities, or in more severe cases, insolvency. Failure may occur due to a company’s withdrawal from unprofitable operations, even though they are capable of covering liabilities. Insolvency is another reason why companies cease their operations. The difference lies in a company’s ability to pay their obligations to creditors (Dunis & Triantafyllidis, 2003)
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