Corporate Failure Rates and the Impact of the 1986 Insolvency Act : An Econometric Analysis

There have been a number of studies that have sought to understand the pattern of aggregate business failure rates and model the macro-economic determinants of aggregate corporate liquidations in the UK. This paper uses quarterly data (1961.1-1998.2) on failure rates and potential macroeconomic determinants to build a time-series econometric model which explicitly tests for the impact of changes to the insolvency legislation as encompassed in the Insolvency Act 1986. The enactment of the 1986 Insolvency Act is incorporated into the time-series model determining failure rates along side macroeconomic variables such as the clearing bank base rate, lending to corporate sector, gross corporate profits, the retail price index, and the company birth rate. The econometric results show that the key relationships between failure rates and other potential determinants were changed by the Insolvency Act after 1986.4. The results indicate that there is a structural break over the sample period under examination and provides evidence of a negative association between failure rates and the Insolvency Act of 1986 even after adjusting for other effects. Thus, the preventive effect of the Insolvency Act on business failures shows a short-term impact and longer-term effects in a seemingly well-specified model. The independent effects of other macroeconomic variables were found to be as predicted by theory. JEL Classification : C22, C51, G33