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Article
Publication date: 7 March 2008

Failure processes and causes of company bankruptcy: a typology

Hubert Ooghe and Sofie De Prijcker

The purpose of this paper is to show that previous research about financial and non‐financial causes of bankruptcy has neglected the time dimension of failure. The paper…

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Abstract

Purpose

The purpose of this paper is to show that previous research about financial and non‐financial causes of bankruptcy has neglected the time dimension of failure. The paper seeks to gain deeper insight into the failure process of a company, giving it a more grounded understanding of the relationship between the characteristics of a company, the underlying causes of failure and the financial effects.

Design/methodology/approach

The findings are based on a literature overview and in‐depth case study research.

Findings

Four types of failure processes were observed: the failure process of unsuccessful start‐ ups, the failure process of ambitious growth companies, the failure process of dazzled growth companies, and the failure process of apathetic established companies. Between these four failure processes, there exist major distinctions in terms of the presence and the importance of specific causes of bankruptcy, i.e. errors made by management, errors in the corporate policy and the importance of external factors.

Research limitations/implications

The results of the study are based on qualitative, case study research. No attempt is made to quantify the existence and the importance of the findings. The major constructs that emerged as important in the research are well‐known concepts in the management literature. As a consequence, they should be further developed in order to quantify their effect in large‐scale studies.

Practical implications

Based on the findings, stakeholders of a company can have a clearer view of both the time dimension inherent in corporate failure and the impact of their own actions on bankruptcy.

Originality/value

The paper lays the ground for understanding the process of company failure. Company failure does not happen overnight and therefore a longitudinal and holistic perspective is needed.

Details

Management Decision, vol. 46 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/00251740810854131
ISSN: 0025-1747

Keywords

  • Bankruptcy
  • Financial management
  • Companies
  • Corporate strategy

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Article
Publication date: 6 July 2010

Using analytic network process to assess business failure risks of construction firms

Irem Dikmen, M. Talat Birgonul, Beliz Ozorhon and Nurdan Egilmezer Sapci

The paper seeks to identify the determinants of business failure in construction and to predict the failure likelihood of construction companies by assessing their current…

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Abstract

Purpose

The paper seeks to identify the determinants of business failure in construction and to predict the failure likelihood of construction companies by assessing their current situation based on both company‐specific and external factors.

Design/methodology/approach

A conceptual model is designed based on an extensive literature survey. The analytical network process together with the Delphi method is utilised to compute the importance weights of variables on business failure through interviews and discussions with experts. The applicability of the proposed model is tested on five companies to estimate their failure likelihood by using the findings derived from the analysis.

Findings

The results suggest the importance of organisational and managerial factors, including the efficiency of the value chain at the corporate level, the appropriateness of organisational decisions, and the availability of intangible resources for the survival of construction companies.

Research limitations/implications

The findings of the analysis are limited to the experiences of three professionals in the Turkish construction industry. The performance of the model is only tested in five companies. The accuracy of the model may be improved by using the diverse experiences of a larger group of experts.

Practical implications

The proposed tool may act as an early warning system for construction companies by estimating the level of their failure likelihood. Companies may benefit from the findings of the model to assess their current situations and take necessary action to avoid possible business failures.

Originality/value

The knowledge and experiences of experts are used to obtain a complete model that accommodates both external and company‐specific variables, and more importantly the inter‐relations among them. Similar models may also be developed for companies in other industries to diagnose their bankruptcy or failure likelihood.

Details

Engineering, Construction and Architectural Management, vol. 17 no. 4
Type: Research Article
DOI: https://doi.org/10.1108/09699981011056574
ISSN: 0969-9988

Keywords

  • Business failures
  • Construction industry
  • Organizational performance
  • Turkey

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Article
Publication date: 1 August 2016

Audit failure of New Zealand finance companies – an exploratory investigation

Humayun Kabir, Li Su and Asheq Rahman

The setting of private finance companies that failed in New Zealand during 2006-2012 was characterized by weaker corporate governance and enforcement of securities law…

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Abstract

Purpose

The setting of private finance companies that failed in New Zealand during 2006-2012 was characterized by weaker corporate governance and enforcement of securities law. This paper aims to explore audit failure in this setting and examine whether auditors erred in their audits of the failed finance companies and whether the audit failure rate of Big N auditors was different from that of non-Big N auditors.

Design/methodology/approach

This paper adopts the archival research method and uses three sets of evidence to assess audit failure – the frequency of going concern opinion (GCO) prior to failure, misstatements in the last audited financial statements, and the violation of the Code of Ethics.

Findings

The study finds that only 41 per cent of the sample companies received the GCO in their last audit prior to failure and provides evidence of material misstatements in the financial statements of a number of failed finance companies that received clean audit opinions prior to failure and breaches of the Code of Ethics by a number of auditors. These results strongly indicate audit failure for a number of failed finance companies. The audit failure rate, however, appears less for Big N auditors than for non-Big N auditors.

Practical implications

The study draws attention of the stock market regulator and the accounting profession to an area, the audit of private finance companies, that needs better quality audits.

Originality/value

This paper provides systematic evidence of audit failure in failed finance companies in New Zealand. It also furnishes preliminary evidence of Big N auditors compensating for weaker corporate governance.

Details

Pacific Accounting Review, vol. 28 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/PAR-10-2015-0043
ISSN: 0114-0582

Keywords

  • Finance companies
  • Audit failure
  • Audit quality
  • Institutional environment

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Article
Publication date: 1 March 1984

Bankruptcy, Working Capital and Funds Flow Components

James A. Gentry, Paul Newbold and David T. Whitford

The objectives of this study are to offer cash based funds flow components as an alternative to financial ratios for classifying the financial performance of companies; to…

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Abstract

The objectives of this study are to offer cash based funds flow components as an alternative to financial ratios for classifying the financial performance of companies; to test empirically the ability of funds flow components to distinguish between failed and nonfailed companies with special emphasis on working capital components; to analyse the empirical results and make recommendations for future study.

Details

Managerial Finance, vol. 10 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/eb027320
ISSN: 0307-4358

Keywords

  • Working capital
  • Bankruptcy
  • Cash flow
  • Financial models

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Article
Publication date: 6 July 2015

On the relationship between financial and non-financial factors: A case study analysis of financial failure predictors of agribusiness firms in Australia

Nigel Purves, Scott James Niblock and Keith Sloan

The purpose of this paper is to explore the relationship of non-financial and financial factors to firm survival, provide evidence of factors related to financial success…

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Abstract

Purpose

The purpose of this paper is to explore the relationship of non-financial and financial factors to firm survival, provide evidence of factors related to financial success and distress for prominent Australian agricultural firms, and improve the predictive capacity of financial failure models.

Design/methodology/approach

The paper utilizes mixed method exploratory case studies across four Australian agricultural firms (two successful and two failed) listed on the Australian Securities Exchange.

Findings

The authors found that the use of an Integrated Multi-Measured approach provided a higher classification rate for the failed group than those provided by an individual measure. We also discovered that non-financial factors associated with the agricultural organizations studied impacted their success or failure. These factors included managements’ involvement in organizational strategy and the composition of the board of directors. It was also apparent that management decision-making approaches may become frozen, or at best restricted, in the face of impending failure, dependent upon the stress level within the organization and the management skill base.

Practical implications

The cases studied indicated that non-financial factors of failure occurred prior to any financial predictors, intuitively indicating a relationship between non-financial and financial factors in Australian agricultural firms.

Originality/value

The identification of financial and non-financial factors and sound internal processes which distinguish successful and failing firms can be utilized for the development of an early warning predictor of organizational success or failure.

Details

Agricultural Finance Review, vol. 75 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/AFR-04-2014-0007
ISSN: 0002-1466

Keywords

  • Australia
  • Management
  • Agriculture
  • Organization
  • Financial failure
  • Non-financial factors

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Article
Publication date: 1 June 2002

Corporate failure rates and the impact of the 1986 insolvency act: an econometric analysis

Jia Liu and Nick Wilson

Reviews previous research on the links between business failures, macroeconomic conditions and insolvency law; and develops a mathematical, econometric model to…

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Abstract

Reviews previous research on the links between business failures, macroeconomic conditions and insolvency law; and develops a mathematical, econometric model to investigate them further, using 1996‐1998 UK data. Presents and discusses the results, which suggest that the 1986 Insolvency Act did help to reduce the overall level of business failures and estimates that it saved 1100 companies from bankruptcy in the first three years after implementation. Finds that interest rates, price levels, levels of business formation, credit conditions and profit levels also affect business failure rates.

Details

Managerial Finance, vol. 28 no. 6
Type: Research Article
DOI: https://doi.org/10.1108/03074350210767924
ISSN: 0307-4358

Keywords

  • Business failures
  • Legislation
  • Economic conditions
  • Modelling
  • United Kingdom

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Article
Publication date: 1 February 2000

Business failures in the construction industry

DAVID ARDITI, ALMULA KOKSAL and SERDAR KALE

The objective of the research presented in this paper is to explore the factors associated with company failures in the context of the construction industry. To that end…

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Abstract

The objective of the research presented in this paper is to explore the factors associated with company failures in the context of the construction industry. To that end, the four quadrants of an ‘environment/response’ matrix developed by Boyle & Desai (1991. Journal of Small Business Management, 29, 33–42) are populated with Dun and Bradstreet's US business failure data for the construction industry. The study indicates that budgetary and macroeconomic issues represent 83% of the reasons for construction company failures. This implies that firms that take vigorous administrative measures to address budgeting issues and that react promptly to economic conditions by implementing appropriate strategic policies should be able to avoid failure. On the other hand, issues of adaptability to market conditions and business issues appear to have limited effects on company survivability (6% of the reasons for failure). This implies that administrative measures to fend off internal conflicts that originate for reasons beyond management's control and long‐term strategic decisions to regulate the firm's adaptation to market conditions can also help to prevent failure. An ‘input/output’ model appears to explain the business failure phenomenon better than the ‘environment/response’ one.

Details

Engineering, Construction and Architectural Management, vol. 7 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/eb021137
ISSN: 0969-9988

Keywords

  • bankruptcies
  • business failures
  • construction industry

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Article
Publication date: 20 August 2018

Predictors of corporate survival in the US and Australia: an exploratory case study

Nigel Purves and Scott J. Niblock

The purpose of this paper is to investigate the relationship of financial ratios and non-financial factors of successful and failed corporations in the USA. Specifically…

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Abstract

Purpose

The purpose of this paper is to investigate the relationship of financial ratios and non-financial factors of successful and failed corporations in the USA. Specifically, the authors provide evidence on whether financial ratios and non-financial factors can be jointly included as indicators to improve the predictive capacity of organisational success or failure in different countries and sectors.

Design/methodology/approach

The paper utilises a mixed method exploratory case study focussing on listed corporations in the US and Australian manufacturing, agriculture, finance and property sectors.

Findings

The financial ratio findings demonstrate that (with the exception of the failed Australian manufacturing sector) the integrated multi-measure (IMM) ratio approach consistently provides a higher classification rate for the failed and successful groups than those provided by an individual measure. In all cases the IMM method scored higher for US companies (with the exception of the failed Australian property sector). The findings also show that irrespective of the country location or sector, non-financial factors such as board composition and managements’ involvement in organisational strategy impact on a corporation’s success or failure.

Practical implications

The findings reveal that non-financial factors occur prior to financial ratios when attempting to predict organisational success or failure and the IMM approach enables a more thorough examination of the predictive ability of financial ratios for US and Australian organisations. This intuitively indicates that when combined with financial ratios, non-financial factors may be a useful predictor of corporate success or failure across countries and sectors.

Originality/value

Sound internal processes and the identification of both financial ratios and non-financial factors can be utilised to improve the reliability of financial failure models, enable corrective and preventative steps to be implemented by management and potentially reduce the costs of failure for US and Australian organisations.

Details

Journal of Strategy and Management, vol. 11 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/JSMA-06-2017-0044
ISSN: 1755-425X

Keywords

  • Failure
  • Success
  • Strategy
  • Financial
  • Corporation
  • Non-financial

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Article
Publication date: 18 January 2013

CSR failures in food supply chains – an agency perspective

Anne Wiese and Waldemar Toporowski

Companies implement corporate social responsibility (CSR) practices along their supply chains to fulfil stakeholder requirements. In doing so, failures in which CSR…

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Abstract

Purpose

Companies implement corporate social responsibility (CSR) practices along their supply chains to fulfil stakeholder requirements. In doing so, failures in which CSR aspects are violated also emerge, caused by single supply chain members. In these situations, quite often the other supply chain members also appear responsible although they mostly do not have complete control over suppliers and sub‐suppliers due to information gaps. Therefore, the malpractice of one single company can harm the reputation of related companies. This paper aims to analyse recent CSR failures along food supply chains with the aim of evaluating why these occurred and what possibilities exist to avoid similar failures in the future.

Design/methodology/approach

Agency theory analyses information asymmetries in relationships in which one party delegates work to another party. In the considered failures, the downstream company can be regarded as principal by ordering products from the suppliers (agents). Consequently, agency theory contributes towards understanding failures in CSR implementation and highlighting solutions.

Findings

The cases analysed illustrate that CSR failures can have negative impacts on the companies' reputation and therefore also financial effects. Implementing a successful CSR policy should therefore be a primary interest of companies. Agency theory proved suitable to illustrate supply chain relationships and point out implications for companies. The instruments of agency theory can help to avoid CSR failures in food supply chains.

Originality/value

The paper combines agency theory with failures in CSR along food supply chains. In doing so, new insights into supply chain relationships are gained and implications for supply chain members to avoid CSR failures can be deduced. One special characteristic of the analysed failures is that the principal is not aimed at increasing the quantity of the agent's output but the quality.

Details

British Food Journal, vol. 115 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/00070701311289894
ISSN: 0007-070X

Keywords

  • Corporate social responsibility
  • Supply chain management
  • Food industry
  • Failures
  • Agency theory

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Book part
Publication date: 10 August 2015

Principal Agent Relations and the Decline of the Royal African Company

Matthew Norton

Several explanations for the Royal African Company’s failure around the turn of the eighteenth century have been suggested. The paper argues that these reasons can be…

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Abstract

Several explanations for the Royal African Company’s failure around the turn of the eighteenth century have been suggested. The paper argues that these reasons can be integrated into a more comprehensive account of the company’s failure through the introduction of a modified version of principal-agent theory. Instead of focusing on abstract, dyadic relationships, the paper proposes a model that accounts for the meaningful character of principal agent interactions and for the complex networks and multiple role identities of actors within those networks that comprised principal-agent relations within the company. On the basis of this model the failure of the company can be seen as a result of contradictions between its dual role as both agent and principal. The symbolic importance of inefficient trading practices helps to explain why the company was unable to pursue alternative strategies or otherwise benefit from its monopoly.

Details

Chartering Capitalism: Organizing Markets, States, and Publics
Type: Book
DOI: https://doi.org/10.1108/S0198-871920150000029003
ISBN: 978-1-78560-093-7

Keywords

  • Royal African Company
  • slavery
  • principal agent theory
  • cultural sociology
  • imperialism

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