Business Failures and Macroeconomic Risk Factors 1

Abstract

This paper analyzes the characteristics of businesses in Israel that went into liquidation. It finds that those businesses had fewer employees than the average, localmarket oriented, and were mainly in manufacturing, and in particular in traditional industries. Quarterly data (from 1990:I to 2002:I) on the compulsory company liquidation rate and potential macroeconomic determinants are used to build a timeseries econometric model which tests explicitly for the impact of macroeconomic variables on the number of company liquidations in Israel. The results show that the liquidation rate rises with unexpected inflation and with positive changes in the nominal and real interest rates. The output gap negatively affects the liquidation rate. In line with the findings of Bernanke, Gertler and Gilchrist (1996), it was found that the factors relevant to the businesses that went into liquidation do not necessarily affect the financial distress of traded companies. This is because the latter are generally larger and can therefore more readily raise debt or capital, and are usually less affected by credit rationing.

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