Age and size dependencies of firm failure processes: an analysis of bankrupted Estonian firms

Abstract

Purpose

This study aims to find out whether firm failure processes are age- and size-dependent.

Design/methodology/approach

The sample consists of 333 bankrupted Estonian firms. Failure processes are detected with consecutive factor and cluster analyses of six financial variables calculated for three pre-failure years. Multinomial logistic regression is applied to study the interconnections between failure processes (dependent variable) and firm size and age (independent variables). In addition, the contingency between detected failure processes and failure causes obtained from court judgements are studied.

Findings

Three failure processes are detected, of which the predominant one accounting for 55 per cent of cases is a gradual failure process, indicating a step-by-step decline in the values of financial variables. The two minority processes are mixed, meaning that some financial variables are poor for many years before the bankruptcy and others decrease only shortly before bankruptcy declaration. With an increase in firm size, the gradual failure process becomes more common, but in turn, the presence of the gradual failure process is not age-dependent. Failure causes detected by trustees are not associated with failure processes.

Originality/value

This paper is the first one to specifically outline the age and size dependencies of firm failure processes. In addition, the interconnection of failure causes and firm failure processes detected with financial variables are rarely studied topics.

Citation

Lukason, O. (2018), "Age and size dependencies of firm failure processes: an analysis of bankrupted Estonian firms", International Journal of Law and Management, Vol. 60 No. 6, pp. 1272-1285. https://doi.org/10.1108/IJLMA-03-2017-0071