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

Abstract

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

Bunn, Philip and Redwood, Victoria, Company Accounts-Based Modelling of Business Failures and the Implications for Financial Stability (December 2003). Bank of England Working Paper No. 210. Available at SSRN: https://ssrn.com/abstract=598276 or http://dx.doi.org/10.2139/ssrn.598276

Philip Bunn (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Victoria Redwood

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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