Business Failure and Macroeconomic Instability (CBR project)


Aims and objectives

This research programme, supported by the Leverhulme Trust, examined the legal, accounting and economic background to company exit either into bankruptcy or acquisition. The grant supported four projects which are reported together here. They were: Macroeconomic Stability and Business Failure; Concepts of Insolvency; Insolvency and Stakeholding; and Modelling Business Duration and Business Failure. We sought to determine how macroeconomic instability impacted on firms and changed the probability that exit into bankruptcy or acquisition would take place. We also examined the factors that determine small business failure and acquisition with a particular emphasis on managerial aspects of the firm obtained from sample surveys. We examined the role that accounting information played in securing the economically efficient exit of firms during the process of insolvency.

Results and dissemination

We find clear evidence that instability in the macroeconomic environment is detrimental to companies. Newly listed companies were more likely to go bankrupt when the pound depreciates sharply. Uncertainty in the form of sharp increases in inflation also makes new firms more prone to go bankrupt. Acquisition activity at this time is often subdued and so firms that might have otherwise been taken over go bankrupt. Moreover, from our analysis of small and medium sized firms we are able to identify a much more important role for the age and experience of the chief executive than has been found previously. Once a firm is bankrupt and becomes insolvent, our research also shows that, when looking at the type of accounting information that is available, the relevant measures of insolvency are not independent of beliefs of groups such as creditors and customers, about the probability that a company will survive. As a result, firm value deteriorates rapidly simply in response to changing perceptions of its survival prospects. English insolvency law has allowed much of the decision-making power to be allocated to a bank through the grant of a floating charge, a framework which has been much-criticised in the academic literature and which has recently been altered by legislation in significant respects (the Enterprise Act 2002). Our work suggests that notwithstanding this criticism, there might be efficiencies to the concentration of decision-making power which bank-led processes involve. In particular, the concentration of rights often facilitates pre-insolvency decision making by interested parties.

Principal investigators and research associates

  • Sean Holly
  • Alan Hughes
  • Paul Kattuman
  • Melvyn Weeks
  • Andy Cosh
  • Simon Deakin
  • Hashem Pesaran
  • Andrew Harvey
  • Chris Higson
  • Geoff Meeks
  • Geoff Whittington

Project status



Journal articles

Armour, J. and Frisby, S. (2001) ‘Rethinking receivership.’ Oxford Journal of Legal Studies 21: 73-102.

Amrour, J and Deakin, S (forthcoming 2003) ‘Insolvency and employment protection: the mixed effects of the Acquired Rights Directive’, International Law Review and Economics, 23.

Armour, J. and Deakin, S. (2001) ‘Norms in private insolvency: the ‘London Approach’ to the resolution of financial distress’ Journal of Corporate Law Studies 1: 21-51

Armour, J. and Deakin, S. (2000) ‘The Rover case (2): bargaining in the shadow of TUPE’ Industrial Law Journal 29: 395-402.

Armour, J. (2000) ‘Who pays when polluters go bust?’ Law Quarterly Review 116: 200-204

Armour, J. (2000) ‘Share capital and creditor protection: efficient rules for a modern company law?’ Modern Law Review 63: 355-378

Higson, C., Holly, S., Kattuman, P. (2002) ‘The Cross Sectional Dynamics of the US Business Cycle: 1950-1999, Journal of Economic Dynamics and Control, 26, 1539-1555.

Isachenkova, N. and Hunter, J. (2003 forthcoming) ‘Failure risk: a comparative study of UK and Russian firms’, Journal of Policy Modelling.

Book chapters

Armour, J. (2001) ‘The law and economics of corporate insolvency: a review’ in R.D. Vriesendorp, J.A. McCahery and F.M.J. Verstijlen (eds.) Comparative and International Perspectives on Bankruptcy Law Reform in the Netherlands (The Hague: Boom Juridische uitgevers), 99-138.

Armour, J. and Frisby, S. (2001) ‘Rethinking receivership’, in M.J. Whincop (ed.), Bridging the Entrepreneurial Finance Gap: Linking Governance with Regulatory Policy, Aldershot, Ashgate.

Bullock, A., Cosh, A.D. and Hughes, A. (2000) ‘Survival, Size, Age and Growth’ in Cosh, A.D. and Hughes A. (eds.) British Enterprise in Transition, ESRC Centre for Business Research, University of Cambridge

Bullock, A. and Hughes, A. (2000) ‘The Survey Method, the SME Panel Database and Sample Attrition’ in Cosh, A.D. and Hughes A. (eds.) British Enterprise in Transition, ESRC Centre for Business Research, University of Cambridge

Working papers

Armour, J. (1999) ‘Share capital and creditor protection: efficient rules for a modern company law?’ CBR Working Paper 148, December 1999.

Bhattacharjee, A., Higson, C., Holly, S. and Kattuman, P. (2001) ‘Macroeconomic Instability and Business Exit: Determinants of Failures and Acquisitions of large UK firms. DAE Working Paper 0206.

Chadha, J., Higson, C., Holly, S., Kattuman, P. (2001) ‘The Channels of Monetary Policy: Evidence from firm level data in the US and UK’, mimeo.

Higson, C., Holly, S., Kattuman, S. and Platis, S. (2001) ‘The Business Cycle, Macroeconomic Shocks and the Cross Section: The Growth of UK Quoted Companies’ DAE Working Paper 00114. Final revised version submitted to Economica.

Higson, C., Holly, S. and Platis, S. (2001), ‘Modelling Aggregate UK Merger and Acquisition Activity’ mimeo

Higson, C., Holly, S. and Platis, S. (2001), ‘Biases in the Aggregate US M&A Series: a Cautionary Note’ mimeo

Higson, C., Holly, S. and Platis, S. (2001), ‘Are there Common Sector Merger Waves?’, mimeo

Isachenkova, N. and Hunter, J. (2001) ‘On the determinants of industrial firm failure in the UK and Russia in the 1990s’, CBR Working Paper 208.

Isachenkova, N and Weeks, M (2002) ‘Competing Risks of Small Firm Survival: a Bayesian Approach’, mimeo.

Law, C (2000) A Review of Modelling Strategies and Literature relating to business duration and failure (MIMEO CBR Cambridge).

Meeks, G. and Whittington, G. (2001), ‘Death on the stock exchange: the fate of the 1948 population of UK listed companies’.

Meeks, G. and Meeks, J.G. (2002a), ‘Self-fulfilling prophecies of failure: the endogenous balance sheets of distressed companies’, mimeo

Meeks, G. and Meeks, J.G. (2002b), ‘A Gouldian view of corporate failure in the process of economic natural selection’, mimeo

Tweedie, D. and Whittington, G. (2000), ‘The future of accounting for business combinations’, Cambridge Discussion Papers in Accounting and Finance, 45.


Holly, S and Kattuman, P et al. (2002) A database of the accounts of UK quoted companies – spanning 1948-1998, linking the Cambridge/DTI database of quoted UK companies from 1948-1998, with the EXSTAT database (1971-1998) and DATASTREAM.