The determinants of aggregate creditors’ voluntary liquidations

Abstract

This article investigates the determinants of Creditors’ Voluntary Liquidations (CVLs), an area of research that has received comparatively scant attention in the literature despite the fact that, at least in the UK, this form of insolvency has consistently comprised the majority of company failures. It develops an Equilibrium Correction Model (ECM) to explain variations in the aggregate number of CVLs in England and Wales between 1963 and 1995. This is then subjected to out-of-sample testing over the subsequent 10-year period. The results indicate that in both the short-run and the long-run, changes in the level of liquidations can be explained by two main explanatory variables namely: the nominal after-tax cost of borrowing and changes in the overall level of economic activity. In addition, confirmatory evidence is provided for the dampening effect of the 1986 Insolvency Act on the number of liquidations. The model retains its forecasting accuracy in the out-of-sample period although there is possibly some preliminary evidence of a further mitigating effect associated with the Enterprise Act 2002.