Stages and determinants of European Union small and medium sized firms' failure process

Abstract

This paper uses a combination of Factor and Cluster analysis to identify and compare failure processes in small and medium sized firms from a number of European Union countries. Panel data analysis is then used to identify the determinants of the firms' transition from financial health towards liquidation in the alternative failure processes. The results suggest that there are four different firm failure processes. We find that financial performance and director characteristics differ between firm failure processes. We also find that the economic environment, the legal tradition of countries and excessive firm growth are determinants of the transition of firms towards liquidation across most firm failure processes. These findings may be of practical use to policy makers, lenders and risk managers who will benefit from a better understanding of the differences between the alternative firm failure processes and from the determinants of a firm's transition towards liquidation within these failure processes.