Firm Failure Research Articles

Risk preference of top management team and the failure of technological innovation in firms–based on principal component analysis and probit regression

As an important psychological feature that affects the strategic decision-making of top management team (TMT), risk preference exerts important impact on the failure of innovation. Taking Chinese pharmaceutical listed companies from 2011 to 2017 as research samples, this paper uses principal component analysis and probit regression model to empirically test the impact of TMT risk preference on technological innovation failure of firms from the perspective of government intervention. It is found that TMT’s risk preference has a significantly positive impact on the failure of firms’ technological innovation. The regulatory role of government intervention between TMT’s risk preference and failure of firms’ technological innovation is an inverted U-shaped relationship. Low or high level of government intervention will promote the positive impact of TMT’s risk preference on the failure of technological innovation, and increase the risk of technological innovation failure. The findings of this study contribute to: (1) broaden the research perspective of technological innovation failure. (2) The innovation failure rate can be reduced by constructing or optimizing the TMT and the government intervening in firm innovation through reasonable and perfect technology innovation guidance policies. (3) expand the research means of innovation failure, making the results more convincing.

Firms, Failures, and Fluctuations: The Macroeconomics of Supply Chain Disruptions

This paper studies how firm failures and the resulting disruptions to supply chains can amplify negative shocks. We develop a non-competitive model where customized supplier-customer relations increase productivity, and the relationship-specific surplus generated between firms and their suppliers is divided via bargaining. Changes in productivity alter the distribution of surplus throughout the economy and determine which firms are at the margin of failure. A firm’s failure may spread to its suppliers and customers and to firms in other parts of the production network. We provide existence, uniqueness, and a series of comparative statics results, and show how the response of the equilibrium production network may propagate recessionary shocks.

Sizing Up Corporate Restructuring in the COVID-19 Crisis

:In the wake of the COVID-19 pandemic, the financial and legal system will need to deal with a surge of financial distress in the business sector. Some firms will be able to survive, while others will face bankruptcy and thus need to be liquidated or reorganized. Many surviving firms will need to be downsized or acquired. In normal times, this triage is supported by the court system, banks, and financial markets. The goal of this paper is to size up the coming surge of financial distress, list the challenges it presents in the current environment, and offer potential policy solutions. Overall, our analysis suggests that the two key issues will be court congestion and excess liquidation and failure of small firms.

Business Management and Innovation: A Critical Analysis of Small Business Success

In a management field, success and failure can be interpreted as measures of good or indifferent management, but it may occur for other reasons such as luck. Numerous terms have been used in the literature to describe firm failure, for example: bankruptcy, insolvency, liquidation, death, deregistering, discontinuance, ceasing to trade, closure, and exit. The overall aim of this research was to develop a clearer understanding of the factors that influence success of Micro Enterprises in Bamenda, as perceived by local Small business managers. The prime motive for conducting this study is to get a comprehensive model relating to the various success factors for small business managers. The mixed methods approach is used to avoid common method bias that could affect the results of this research study. In the first phase, a quantitative approach was employed in the form of a survey questionnaire, in order to identify the critical success factors for Small businesses in the city of Bamenda as perceived by Small business managers and to classify and compare successful and less successful Small businesses with respect to the identified factors. The second phase adopted a qualitative approach to explore how Small business Small business managers see the factors that facilitate business ‘success’ in relation to their experiences in Bamenda. This study has shown that understanding the success of small businesses from the perspective of small business managers is a complex challenge. Findings of the two phases of the study showed that a host of internal as well as external factors, which are usually moderated by other variables, seem to influence business success in Bamenda. However, while many factors are conceptually similar to other studies in different contexts, others are context-based and closely linked to the specific characteristics of the situation in Bamenda. This finding suggests a close relationship with networking and business success. It can be suggested that the ability to develop relationships and to build a method of business that strengthens and manages relationships is a significant factor in Cameroonian business and society in general.

Tenancy by the Entirety and the Value of Wealth Insurance for Entrepreneurs

This paper explores the willingness of entrepreneurs to pay for wealth insurance to protect personal assets in case of business failure and the impact of this strategy on small business operation decisions. I show that antidiscrimination laws allow married firm owners in half of U.S. states to choose between asset protection and having more collateral for business funding, allowing entrepreneurs to reveal their valuation for preserving personal assets at time of failure. I find that firm owners value asset protection offered by tenancy by the entirety laws at $900-$1000 per year. Firms receive smaller loans when entrepreneurs use this form of ownership to reduce the personal costs of firm failure, but show no differences in hiring patterns or spending on risky projects. This strategy of preparation in case of failure appears to affect small businesses through the funding channel.

Stages and determinants of European Union small and medium sized firms' failure process

This paper uses a combination of Factor and Cluster analysis to identify and compare failure processes in small and medium sized firms from a number of European Union countries. Panel data analysis is then used to identify the determinants of the firms' transition from financial health towards liquidation in the alternative failure processes. The results suggest that there are four different firm failure processes. We find that financial performance and director characteristics differ between firm failure processes. We also find that the economic environment, the legal tradition of countries and excessive firm growth are determinants of the transition of firms towards liquidation across most firm failure processes. These findings may be of practical use to policy makers, lenders and risk managers who will benefit from a better understanding of the differences between the alternative firm failure processes and from the determinants of a firm's transition towards liquidation within these failure processes.

An organismic approach to multinational enterprise failure

PurposeThe purpose of this paper is to answer why some multinational enterprises (MNEs) fail within the international business (IB) domain.Design/methodology/approachConceptually, the study takes an organismic approach to MNE failure. Methodologically, it adopts an elite interview approach derived from the Delphi technique. Respondents are 39 IB and strategic management academics.FindingsThe paper finds that MNE failure is rooted in strategic leadership and capabilities (i.e. internal deterioration of organizational resources and strategies) and institutional pressures and differences, and these factors lead to deterioration of institutional legitimacy for an MNE.Originality/valueThe paper conducts a review of the firm failure and foreign divestment literature and undertakes an organismic approach to the analysis of MNE failure in the IB context. The paper provides useful insights on developing and implementing both market and non-market strategies for overcoming MNE internationalization failure.

Predicting firm failure in the software industry

Firm failure rate in the software industry is significantly higher than other industries. Due to the wide use of software products and services, failure in the software industry has implications on the industry itself as well as the economy at the local, national and global levels. This study compares the classification performance of thirteen approaches in terms of predicting firm failure in the US software industry. Seven measures are used to evaluate the classifiers’ performance. We use synthetic minority oversampling technique (SMOTE), SMOTEBoost and SMOTEBagging to account for the data imbalance issue. In order to give managers enough time to develop strategies and take the necessary actions to reduce the likelihood of failing, we use 20 financial indicators collected 4 years before the last available date about each firm. Our findings show that embedding SMOTE into boosting and bagging algorithms is better than preprocessing data using SMOTE before learning the classifier. According to the sensitivity analysis, research and development expense is the most significant predictor of firm failure followed by net sales and total revenue. Our results can be used by managers as a decision support tool to identify high-risk firms at an early stage and take the necessary actions to prevent a firm from failing. The early prediction of firm failure will allow software firms to modularize their products or services into specific “features” and offer them as “digital services” using new business models or combine these services with partner firms’ services to create new products and address evolving customer expectations. Moreover, the early prediction of firm failure in the software industry calls on firms, both new and those in the growth stage, to componentize their design for adaptability and to build agility in the way firms use their resource mix to address both market gaps as well as operational gaps.

Debt-to-equity conversion in bankruptcy reorganization and post-bankruptcy firm survival

Debt-to-equity conversion is a commonly used legal tool for financial restructuring of ailing businesses, yet systematic evidence on the consequences of debt-to-equity conversion for firm outcomes is scarce. Drawing on a novel dataset of bankruptcy reorganizations from Slovenia and exploiting variation in the incidence of debt-to-equity conversion across firms, we provide the first empirical analysis of the role of debt-to-equity conversion in bankruptcy reorganization as a determinant of post-bankruptcy firm survival. To address endogeneity concerns, we use a plethora of controls and fixed effects, quantify the sensitivity of our estimates to selection on unobservables, and rely on instrumental variable methods. We find that debt-to-equity conversion is robustly negatively associated with prospects of post-bankruptcy firm failure. Our findings provide a novel input into ongoing debates about the appropriate design of corporate bankruptcy institutions.

Self-employment, gender, financial knowledge, and high-cost borrowing

ABSTRACT Poor financial decisions are a primary cause of small firm failure. This research therefore reports on an examination of antecedents behind questionable financial borrowing practices among self-employed individuals. Poor financial decisions are proxied as the use of high-cost short-term payday loans, check-cashing services, and the like (collectively, alternative financial services, AFS). More than 20 percent of self-employed individuals in the United States reported having borrowed from AFS providers, a practice that is arguably symptomatic of the poor financial decisions that could lead to business failure. Self-employed individuals, particularly those with high levels of financial self-efficacy (an attribute important to entrepreneurship) are particularly likely to employ AFS borrowing. Overconfident individuals, including self-employed individuals, comprise a disproportionate fraction of AFS users. This work also found that financial knowledge among self-employed people is, on average, no higher than that among employees, and low financial knowledge is also associated with AFS usage. Women, even though generally less financially knowledgeable than men, are relatively less likely than men to use AFS borrowing.

THE ROLES OF INSTITUTIONAL INVESTORS IN THE FAILURE OF NEWLY PUBLIC STOCKS

AbstractIn this article, we study two negative events that can happen to newly public stocks: (1) the price drops at least 50% from the closing price on the first trading date within one year after the initial public offering (IPO) (initial failure) and (2) the firm is delisted for negative reasons within three years after the IPO (final failure). We find that high investor sentiment at the time of IPO can lead to both initial failure and final failure of IPO firms, whereas monitoring by external professionals plays a more important role in averting final failure than initial failure. Exploring the roles of different types of institutional investors, we find that transient (i.e., short‐term trading) institutions sell before initial failure. In contrast, dedicated (i.e., monitoring) institutions focus on long‐term performance and may stay with stocks suffering temporary initial failure, but their selling typically signals the imminent final failure of newly public firms.

Karar Ağacı Algoritmalarıyla Finansal Başarısızlık Tahmini: Dokuma, Giyim Eşyası ve Deri Sektörü Uygulaması

Bu çalışma, 2016-2018 döneminde Borsa İstanbul (BIST)’da listelenen dokuma, giyim eşyası ve deri sektöründeki şirketlerin finansal başarısızlığının araştırılması, bu durumu etkileyen finansal oranların tespit edilmesi ve veri madenciliği algoritmalarının finansal başarısızlığı tahmin etmedeki güçlerinin test edilmesini sağlamak amacıyla gerçekleştirilmiştir. Bu kapsamda sektörde yer alan 20 şirketin üç yıllık finansal durumu Altman Z skoru yardımıyla değerlendirilmiş ve başarılı ve başarısız şirketler tespit edilmiştir. Ardından çeşitli finansal oranlar kullanılarak, veri madenciliği algoritmalarından CHAID, Exh-CHAID, CART ve QUEST’in şirketleri finansal başarısızlık açısından ne derece doğru sınıflandırdığı ve finansal başarısızlığı en çok etkileyen faktörlerin neler olduğu tespit edilmeye çalışılmıştır. Yapılan analizler sonucunda kullanıma en uygun tahminleme yönteminin, genel şirket sınıflandırmasını %95, başarısız şirket sınıfladırmasını ise %97.6 oranında bir doğruluk payıyla gerçekleştiren CART olduğu belirlenmiştir. Ayrıca başta özsermaye karlılığı olmak üzere, cari oran, duran varlıkların özsermayeye oranı, ticari alacakların aktiflere oranı, stok devir hızı ve faiz karşılama oranının finansal başarıyı etkilediği tespit edilmiştir.

How Does Financial Analysis Influence the Firm's Failure of Iraqi Private Sector?

The objective of this study is to examine the failure of construction companies services by using Abbas and Rashid Model. This study comprised sample of 38 companies in construction companies services at Iraq. A Wilcoxon Test was used to compare between the Abbas and Rashid Model & Kida Model. Data were gathered from the construction companies services listed on the Iraq financial market for the period 2012-2015. This study results show that the Kida Model is the best model where it is most accurate in predicting the failure in the construction companies services in Iraq. The data for this study are collected from the construction companies that listed in the Iraqi financial market. Recommendations for future research are needed to conduct similar studies to compare the models for predicting company failure in other sectors such as the industrial sector.

Effect of corporate governance on stock market liquidity: empirical evidence from Indian companies

Despite the crucial role that stock market liquidity can play in the financial markets during times of financial turmoil, little is known about its drivers. The series of high-profile firm failures and economic distresses which have been initiated by liquidity risk mismanagement and model failure has highlighted the mounting importance of stock market liquidity, predominantly in the increasingly integrated global market. Corporate governance has been characterized as a set of mechanisms for board effectiveness and transparent disclosures. It protects investors from opportunistic behavior as it results in improved quality and quantity of information made available to them. It encompasses internal corporate governance variables pertaining to board structure and audit committee characteristics as well as the external corporate variables such as market control and takeovers. Indian companies are required to have more effective boards and are more transparent as required by the corporate governance and tougher disclosure legislations. The information so provided facilitates quality of price formation and helps in improving the stock market liquidity. This paper endeavors to investigate the impact of corporate governance (CG) on the stock market liquidity in Indian companies. The CG and stock market liquidity were measured in the sample BSE 500 listed companies during the FY 2013–FY 2017. Panel data regression model is applied for testing the hypothesized association. In addition, an effort has been made to investigate the overall scope of stock market liquidity in a broader context through a comprehensive analysis of stock market liquidity across industry sectors, size and individual company-specific characteristics. The study provides evidence of the important role played by CG in enhancing stock market liquidity of the company. It can guide the board of directors to enhance financial disclosures which consequently increases stock market liquidity. The analysis provides regulators, educators and investors an insight into the role of CG attributes in capital markets and thus helps them in improving their decision-making. It provides corporate policy makers some of the necessary inputs to chart the course of CG reforms and their enforcement in the country in future.

Entrepreneurs’ Legal Status Choices and the C Corporation Survival Penalty

Foundational to the American Dream is the ability to easily and rapidly start a new business. Over the past quarter century, the introduction of the limited liability company (LLC) dramatically shifted and complicated the choice-of-legal-status calculus for entrepreneurs, and in its wake a consensus against the use of traditional C corporations by closely-held firms emerged. The C corporation, scholars argued, had fatal drawbacks despite its simplicity: tax disadvantages as well as governance inflexibility. Due to historically limited sources of data, there has been little empirical research on choice-of-entity generally and none that explores the anti-C corporation thesis in particular. Have C corporations underperformed as compared to similarly situated businesses with alternative legal statuses? This paper exploits a large panel dataset that contains legal status, owner, business, financing, and other firm-specific information collected from an eight-year survey of nearly 5,000 enterprises that were formed in 2004. It presents four main results. First, C corporation status is associated with firm failure rates that are 38 percent higher (significant at 0.1 percent) than those of non-C corporations with similar characteristics. Second, this C corporation survival penalty persists at nearly the same magnitude and significance even after a subset of “anticipated cash-exit” C corporations with (a) venture capital investors or (b) employee stock option plans are separated out. Third, nonwhite and foreign-born entrepreneurs have a significantly higher likelihood of choosing C corporation status. Fourth, within the subset of firms that appear eligible to elect out of the default (Subchapter C) corporate tax classification and into the tax-advantaged Subchapter S classification, nonwhite and older entrepreneurs are significantly more likely to remain in C corporation status. These findings suggest that increasing legal status complexity is unlikely to be neutral from a distributive perspective, and may be disproportionately burdensome for marginalized entrepreneurs.

Do initial financial conditions determine the exit routes of start-up firms?

This study investigates the impact of initial financial conditions on the post-entry performance of firms in a sample of 16,185 Japanese joint-stock companies. We examine whether initial financial conditions, including entry regulations, affect the duration of survival among Japanese start-up firms, distinguishing between failure and merger. We provide evidence that start-up firms that rely more on equity than on debt financing are less likely to fail within a shorter period, although we find little evidence that initial equity size has a significant effect on the time to failure of start-up firms in our sample. Moreover, we find the negative effect of equity financing on the time to failure to be greater for start-up firms founded following the abolition of regulations for minimum capital requirements. Furthermore, the results reveal that start-up firms with larger initial equity capital are more likely to exit through merger, indicating that the effects of initial financial conditions depend on the type of exit route.

On the Relationship Between Firms and Their Legal Environment: The Role of Cultural Consonance

In this study we seek to reconcile diverging dominant views on the relationship between firms and their legal environment by offering a cultural contingency perspective. We begin by accepting the notion that a new law will likely exert a powerful influence on targeted firms and that firms’ strategic responses include efforts to shape the impact of the new law. However, we suggest that the success of such response will be contingent on the degree of cultural consonance of firms’ strategic responses and the dominant cultural context at that time. We elaborate this view in our detailed qualitative and quantitative analyses of the automotive Safety Act of 1966 and the response by targeted firms. We provide evidence showing that the changes in the degree of cultural consonance of firms’ strategic response and the predominant cultural beliefs/values explain both the early failure of firms’ efforts to shape the impact of the law in the mid-1960s and the later success by the end of the 1970s. We highlight how firms’ cultural context provides both a constraint and an opportunity for firms seeking to shape legal environmental pressures, and we conclude by discussing the implications of our dynamic contingency perspective for research on law, culture, and strategy.

Determining the stationary financial cause of contracting firms failure

Failure of the contracting firms becomes an essential part of the construction industry. There are many sources that can cause failure of contracting firms and the financial causes are one of these crucial factors. This study aims at determining the stationary financial cause of contracting firms failure. A questionnaire survey comprises 18 financial causes has been conducted with Egyptian engineers from the big-sized contracting firms for appraising their importance degree. Survey results showed that national downturns in the economy, high prices of building materials, poor estimating practice, delayed progress payments from the client, and non-payment of interest on delayed certificate are the main causes behind contracting firms failure. Further, Ginni’s mean difference measure of dispersion revealed that the stationary financial cause of contacting firms failure is contractor firm starting business with a small paid-up capital. Finally, in a comparison with seven developing countries, the stationary financial cause was found to be the most frequent cause of contracting firms failure, influencing 85.71% of the surveyed countries. The findings bridge a gap in knowledge regarding the financial causes of the failure of the big-sized contracting firms in Egypt, to be utilized as variables for failure prediction models in future works.

The Effect of Productivity and Innovation on the Competitiveness of Batik SMEs in West Java Indonesia

Objective - This research aims to test the effect of productivity and innovation toward competitiveness of batik SMEs in West Java. Methodology/Technique - The study uses Partial Least Square (PLS) for data analysis, as well as an explanatory method and simple random sampling. Findings - The results of the data testing show that competitiveness is effected by productivity and innovation by 71.7%. Novelty - The objective of this study is to analyse the gap in productivity and innovation and its effect on the competitiveness of batik SMEs in West Java Indonesia. Batik centre in West Java was developed by the government in collaboration with the private sector to increase the level of production of batik SMEs. In reality, there is a gap in productivity between written batik and stamped batik. Written batik design innovations and production methods need to be improved to compete and survive in the batik industry. Porter (1995:5) describes competition as the core of the success or failure of firms. Productivity of written batik has declined in the past 5 years. From recent BPS data, processed by the Pusdatin Ministry of Industry 2017, the industry has declined by around 10% per year between 2012 and 2017. Type of Paper: Empirical. Keywords: Productivity; Innovation; Competitiveness; Batik; Small and Medium Enterprises. JEL Classification: M10, M11, M19.

To cluster or not to cluster? Spatial determinants of closures in the American craft brewing industry

AbstractAs the American craft brewing industry matures, closures are becoming more prevalent. This paper studies the geographic patterns of and locational factors associated with craft brewery closures in three US cities with particular focus on the role of clustering on firm mortality. While the proximity of other breweries is not statistically significant in explaining brewery mortality, closures appear to occur outside of known clusters and in more residential areas outside of downtown districts. This study contributes to the literature on the relationship between clustering and firm failure rates as well as the debate regarding land use regulations surrounding craft breweries.