Predicting corporate failure in New Zealand : a macroeconomic perspective

Abstract

Since the seminal work of Beaver (1966), most research into bankruptcy prediction models has been carried out using discriminate analysis on a combination of firm specific factors. Although it is well recognised by many authorities that the external environment in which a firm operates has a large impact on whether the firm eventually survives or not, only a very limited number of studies have actually attempted to identify these factors, mainly in the United States.

This study attempted to isolate the main macroeconomic factors that are causally related to the New Zealand aggregate corporate failure rate, and to develop a macroeconomic model of the New Zealand corporate failure rate. Sixteen macroeconomic factors suggested by economic theory, the business cycle literature and other exogenous factors identified by previous research as influencing corporate failure were used in this study in both univariate and multivariate analyses over a period of 35 years. It was found that the association between the corporate failure rate and eleven out of the sixteen macroeconomic factors initially examined were statistically significant. The multivariate analysis using stepwise regression found the unemployment rate of the coincident period, real wages lagged three years, the percentage change in the real GDP lagged one year and the percentage change in wholesale prices lagged three years significant in an OLS model of the New Zealand corporate failure rate. This model was found to be statistically robust.

The results of this investigation will serve as a foundation on which to develop bankruptcy prediction models for New Zealand incorporating both micro and macro variables. Such a model may have a superior predictive ability compared to bankruptcy prediction models derived solely from firm specific information (Zavgren and Friedman, 1988).