Causes of Bankruptcy in Europe and Croatia

Abstract

Ooghe and De Prijcker (2006) presented four main types of failure processes. The first describes the deterioration of unsuccessful newly established companies leaded by a management with a significant lack of managerial and industry related experience. The second is the failure process of ambitious growth companies, which have (after a failed investment) insufficient financial means to adjust their way of doing business to the changes in the environment. Third is the process of dazzled growth companies, leaded by an overconfident management without a realistic view on the company's financial situation. Finally, the fourth type of failure process is describing gradual deterioration of established companies where management had lost touch with the changing environment.

These types are based on the analysis of a sample of bankrupt Belgian companies, and can be perceived as general, universal, and common to all European economies, including Croatia.

However, after reviewing results of our research of bankruptcy issues in Croatia (we sent out a questionnaire to 412 addressees, published an ad hoc web site, compiled and analyzed the results), we could say that they are somewhat inconsistent with the abovementioned types.

According to our respondents, most frequent causes of bankruptcy in Croatia are: • avoiding due obligations, weak financial discipline, • non-payment as a pattern of "normal behaviour", • losing markets after proclaiming independence and during transition, • technological lagging behind, • inconsistent government strategy of development of the nation's economy, • war aftermath, etc.

If we put these causes side by side with the four types of bankruptcy processes as defined by Ooghe and De Prijcker, we can notice that most of Croatian bankruptcy causes are country-specific, and cannot easily be transferred to four types of failure processes.

The article presents further findings of our research and compares it to other experiences in this field, as examined in United Kingdom, Belgium, and European Union in general. We find that bankruptcy causes in Croatia are fairly dissimilar to those in the EU-15 countries.

Keywords: bankruptcy, insolvency, failure, cause, Croatia, Europe

JEL Classification: E61, E69, G33, K29, K42, O52, P21, P52