Macro Economic Instability and Business Exit: Determinants of Failures and Acquisitions of Large UK Firms

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Macro Economic Instability and Business Exit: Determinants of Failures and Acquisitions of Large UK Firms

by A. Bhattacharjee of the Reserve Bank of India,
C. Higson of London Business School,
S. Holly of the University of Cambridge, and
P. Kattuman of the University of Cambridge

March 5, 2002

Abstract: Using data over a 34-year span on UK quoted firms, this paper seeks to identify the factors that increase the likelihood of exit of firms. Firms may disappear through the mutually precluding events of bankruptcies and acquisitions. We use a competing-risks hazard model to determine characteristics leading to each outcome. Hazard models make use of the data on timing of these alternative outcomes and we exploit this to focus attention on how the hazards change over the business cycles, conditional on the post-listing age of the firm. We find that the volatility in macro environment has a role in determining, in different ways, the hazard of firms going bankrupt or being acquired.

JEL Classification: E32, D21, C41, L16.

Keywords: Bankruptcy, Acquisitions, Macro-economic Instability, Competing Risks, Cox Proportional Hazards Model.

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