Abstract

The objective of the study is to examine the impact of both the number and types of causes of business failure onthe failure risk as indicated by values of bankruptcy scores during the process of business decline. Causes ofbankruptcy were obtained from court judgments for 70 Estonian manufacturing firms and classified into twotaxonomies–the number of causes and the different types of causes of failure such as internal (differentmanagement deficiencies) or from factors external to the firm. Bankruptcy scores for the first and secondpre-bankruptcy years were calculated using both Ohlson’s model and a local (Grünberg’s) bankruptcy predictionmodel. Independent samples median tests were applied to examine, whether different causes are associated withdifferent failure risk. Findings indicate that multiple causes lead to a significantly higher bankruptcy risk than asingle cause for the year prior to the declaration of bankruptcy. On the contrary, no significant effect of differenttypes of failure causes was found on the risk of failure. Implications of the results for research and practice arediscussed.

This work is licensed under a Creative Commons Attribution 4.0 License.