Company Accounts-Based Modelling of Business Failures and the Implications for Financial Stability
Bank of England Working Paper No. 210
34 Pages Posted: 4 Oct 2004
Date Written: December 2003
This paper examines the determinants of failure among individual UK public and private companies over the period from 1991 to 2001. Using information on profitability, interest cover, capital gearing, liquidity, company size, industry, whether a firm is a subsidiary and overall economic conditions, it is possible to construct estimates of the probability of failure for individual companies. These are used to calculate each company's 'debt at risk': the probability of failure multiplied by its outstanding debt. By summing the firm-level debt at risk over all companies it is possible to produce an aggregate measure of financial risk that takes account of how debt is distributed across individual companies. Aggregate debt at risk, as a percentage of total debt, has fallen from the levels reached in the early 1990s and has remained relatively stable despite the build-up in corporate debt since then.
Keywords: Corporate failure, probit, financial stability
JEL Classification: C25, G33
Suggested Citation: Suggested Citation