Eliminating the Effects of the Companies Insolvency Risk:A Model Approach
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Jun 26, 2017
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Abstract
Managers around the world identify risk of liquidity problems as the primary barrier of their decisions. In the global economy, in the turbulent environment, the effects of companies' insolvency risk lead to many operational and strategic problems also causes of contagion effect. Therefore, it is important to study the phenomenon of insolvency, determinants that shape it as well as seek opportunities to reduce the risk of this problem. The aim of the study is to identify the determinants that affect the risk of insolvency of companies in Poland as well as propose a model of the effects of companies' insolvency based on the profiles of risk factors and the actions as well as instruments to successfully manage the risks of default. We used Logit Model and Panel Data. Our findings suggest that appropriate debt management, as well as the need for synchronization of receipts and expenditure, which should secure the current payments in a short run is crucial in identifying and reducing the risk of insolvency, in a short term (in relation to all groups of companies). However, in the longer term, consideration should be given to the different factors that can allow the identification of the risk of insolvency, which may further allow the entrepreneurs to make quick response, or spread out over time the operations (e.g. restructuring) and thus allow avoiding the insolvency. Hence, in private companies a sustainable performance should be instituted by the board of directors.
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Rochon, M. P., Franc Dabrowska, J. and Suwala, R. (2017) “Eliminating the Effects of the Companies Insolvency Risk:A Model Approach”, World Journal of Applied Economics, 3(1), pp. 21-37. doi: 10.22440/wjae.3.1.2.
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References
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Franc-Dąbrowska J., Porada-Rochoń M., Suwała R. (2016), Enterprise insolvency and the effects on the local and regional community – the social economy perspective. Acta Scientiarum Polonorum. Oeconomia, Vol. 15 (Issue 2), pp. 37-47.
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Porada-Rochoń, M. (2013), Modele decyzji finansowych mśp w wybranych krajach Europy Środkowo-Wschodnie w warunkach zaburzeń finansowych, Polskie Towarzystwo Ekonomiczne, Szczecin.
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Schendel, D., Patton., G. R. Riggs, J. (1976). Corporate Turnaround Strategies: A study of Profit Decline and Recovery. Journal of General Management, Vol. 3 ( Issue.3).
Shleifer, A Vishny, R. W. (1992) Liquidation Values and Debt Capacity: A Market Equilibrium Approach. Journal of Finance ,Vol.47(Issue 4)
Smith, H. Graves, W. (2005). Gentrification as Corporate Growth Strategy: The Strange Case of Charlotte, North Carolina and the Bank of America. Journal of Urban Affairs, Vol.27, pp. 403–418.
Steven, D., Usdin A., Bloom, M. (2012). Identifying Signs a Company Is in Financial Distress. The Legal Inteligenrer, Vol.245, NO. 80. Reprinted with permission from the April 25.
Sulphey, M. M., Nisa, S. (2013). The Analytical Implication of Altman’s Z-score Analysis of BSE Listed Small CAP Companies. Journal of Commerce and Management Perspective, Vol. 2 (Issue 4), pp. 45-155.
Sudarsanam, S., Lai, J. (2001). Corporate Financial Distress and Turnaround Strategies: An Empirical Analysis. British Journal of Management, Vol. 12, pp. 183–199.
Verbeek, M. (2004). A Guide to Modern Econometrics, 2th edition, Wiley. Hoboken, NJ.
Wallace, R.S.O., Naser, K., Mora, A. (1994) . The relationship between the comprehensiveness of corporate annual reports and firm characteristics in Spain. Accounting and Business Research,Vol.25 (Issue 97), pp. 41-53.
White, M. (1989). The Corporate Bankruptcy Decision , Journal of Economic Perspective, Vol.3, pp.129-151
Zimmerman, F. M. (1991) The Turnaround Experience. Real World Lessons in Revitalizing Corporation. McGraw-Hill.
Zhuang Q., Chen, L. (2014). Dynamic Prediction of Financial Distress Based on Kalman Filtering, Hindawi Publishing Corporation Discrete Dynamics in Nature and Society, Article ID 370280, 10 pages
Altman, E. (1971). Corporate Bankruptcy in America, Lexington, Mass: Heath Lexington.
Argenti, J. (1976). Corporate Collapse, The Causes and Symptoms, McGraw Hill (in:) Zimmerman, F.M. (2002). The Turnaround Experience. The Real-world in Revitalizing Corporatioons, McGraw Hill.
Beaver, W. (1966). Financial Ratios as Predictors of Failure, Empirical Research in accounting: Selected Studies. Supplement to the Journal of Accounting Research Volume 6, pp.71-87.
Beerman, K. (1976). Possible Ways to Predict Capital Losses with Annual Financial Statements, Dusseldorf, University of Dusseldorf.
Baxter R., Russell M., Ang R. (2007). Predictive Model of Insolvency Risk for Australian Corporations Australian Computer Society, Inc. This paper appeared at the Sixth Australasian Data MininConference (AusDM 2007). Gold Coast, Australia. Conferences in Research and Practice in Information Technology (CRPIT), Vol. 70.
European Commission, 2014, Commission Staff Working Document Impact Assessment, Accompanying the document, Commission Recommendation, on a New Approach to Business Failure and Insolvency, {C(2014) 1500 final} {SWD(2014) 62 final}Brussels, 12.3.2014 SWD(2014) 61 final
Elliehausen, G., Wolken, J., (1993). The demand for trade credit: an investigation of motives for trade credit use by small businesses. Board of Governors of the Federal Reserve System Staff Study 165. September, 1–18, Washington, DC.
Ferreira, M. A., Vilela A. (2004). Why do Firms Hold Cash? Evidence from EMU Countries. European Finance Management, Vol. 10, pp. 295–319.
Flagg, D., Kudrimoti, S., Margetis, S. (2011). Do management decisions matter when firms are in distress? RMIC,Vol.4 (Issue 9), pp. 1-19.
Franc-Dąbrowska J., Porada-Rochoń M., Suwała R. (2016), Enterprise insolvency and the effects on the local and regional community – the social economy perspective. Acta Scientiarum Polonorum. Oeconomia, Vol. 15 (Issue 2), pp. 37-47.
Franc-Dąbrowska J., Porada-Rochoń M., Suwała R. (2015), Effects of cash flow management on SME insolvency: methodological approach. Proceedings of World Business, Finance and Management Conference : 14-15 December 2015, Rendezvous Grand Hotel, Auckland, New Zeland, pp. 88-97.
Garcia-Teruel, P. J., Martinez-Solano, P.,(2008). On the Determinants of SME Cash Holdings: Evidence from Spain. Journal of Business Finance & Accounting, Vol.35(Issue1) & (Issue2), pp.127–149.
Gruszczyński, M., Kuszewski, M. Podgórska, T.(ed) (2009). Ekonometria i badania operacyjne. Podręcznik dla studiów licencjackich., Wydawnictwo Naukowe PWN, Warszawa, Wyd. I.
Guney, Y. , Ozkan A., Ozkan N. (2003).Additional International Evidence on Corporate Cash Holding, Working Paper (SSRN Electronic Library).
Hambrick, D. Schecter, S. (1983). Turnaround strategies for mature industrial –product business units. Academy of Management Journal, Vol. 26 (Issue 2)
E. S. Hotchkiss, Kose, I., Thorburn, K. S,. Mooradian, R. M. (2008). Bankruptcy and the Resolution of Financial Distress . Available at SSRN: http://ssrn.com/abstract=1086942
Kopczewska, K., Kopczewski, T., Wójcik, P. (2009). Metody ilościowe w R: aplikacje ekonomiczne i finansowe, CeDeWu.
Koronacki, J., Ćwik, J. (2008). Statystyczne systemy uczące się, Akademicka Oficyna Wydawnicza EXIT, Warszawa Wyd. II.
Larose, T. D. (2008), Metody i modele eksploracji danych, Wydawnictwo Naukowe PWN, Warszawa Wyd. I.
Lupu, D. (2014). Analysis of conceptual approaches for the firm in difficulty. Journal of Public Administration, Finance and Law, Issue 5
Mihai, I. (1997). Analiza situaţiei financiare a agenţilor economici, Editura Mirton, Timişoara
Ooghe, H., van Wymeersch, C. (2006). Traite d’analyse financiere, Kluwer, Antwerpen.
Ozkan, A. and Ozkan, N. (2004). Corporate Cash Holdings: An Empirical Investigation of UK Companies, Journal of Banking and Finance, Vol. 28, pp. 2103–34.
Porada-Rochoń, M. (2013), Modele decyzji finansowych mśp w wybranych krajach Europy Środkowo-Wschodnie w warunkach zaburzeń finansowych, Polskie Towarzystwo Ekonomiczne, Szczecin.
Shyan-Rong Chou Ender Su Sheng-Jung Li Hsien-Chao Cheng, (2010). An Empirical Study of the Relationship Between Corporate Information Disclosure and Financial Distress, International Research Journal of Finance and Economics, (Issue 43)
Schendel, D., Patton., G. R. Riggs, J. (1976). Corporate Turnaround Strategies: A study of Profit Decline and Recovery. Journal of General Management, Vol. 3 ( Issue.3).
Shleifer, A Vishny, R. W. (1992) Liquidation Values and Debt Capacity: A Market Equilibrium Approach. Journal of Finance ,Vol.47(Issue 4)
Smith, H. Graves, W. (2005). Gentrification as Corporate Growth Strategy: The Strange Case of Charlotte, North Carolina and the Bank of America. Journal of Urban Affairs, Vol.27, pp. 403–418.
Steven, D., Usdin A., Bloom, M. (2012). Identifying Signs a Company Is in Financial Distress. The Legal Inteligenrer, Vol.245, NO. 80. Reprinted with permission from the April 25.
Sulphey, M. M., Nisa, S. (2013). The Analytical Implication of Altman’s Z-score Analysis of BSE Listed Small CAP Companies. Journal of Commerce and Management Perspective, Vol. 2 (Issue 4), pp. 45-155.
Sudarsanam, S., Lai, J. (2001). Corporate Financial Distress and Turnaround Strategies: An Empirical Analysis. British Journal of Management, Vol. 12, pp. 183–199.
Verbeek, M. (2004). A Guide to Modern Econometrics, 2th edition, Wiley. Hoboken, NJ.
Wallace, R.S.O., Naser, K., Mora, A. (1994) . The relationship between the comprehensiveness of corporate annual reports and firm characteristics in Spain. Accounting and Business Research,Vol.25 (Issue 97), pp. 41-53.
White, M. (1989). The Corporate Bankruptcy Decision , Journal of Economic Perspective, Vol.3, pp.129-151
Zimmerman, F. M. (1991) The Turnaround Experience. Real World Lessons in Revitalizing Corporation. McGraw-Hill.
Zhuang Q., Chen, L. (2014). Dynamic Prediction of Financial Distress Based on Kalman Filtering, Hindawi Publishing Corporation Discrete Dynamics in Nature and Society, Article ID 370280, 10 pages