Evaluation of the factors influencing business bankruptcy risk in Polad
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Korol, Tomasz Article Evaluation of the factors influencing business bankruptcy risk in Polad e-Finanse: Financial Internet Quarterly Provided in Cooperation with: University of Information Technology and Management, Rzeszów Suggested Citation: Korol, Tomasz (2017) : Evaluation of the factors influencing business bankruptcy risk in Polad, e-Finanse: Financial Internet Quarterly, ISSN 1734-039X, De Gruyter Open, Berlin, Vol. 13, Iss. 2, pp. 22-35, https://doi.org/10.1515/fiqf-2016-0020 This Version is available at: https://hdl.handle.net/10419/197375 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0
www.e-finanse.com University of Information Technology and Management in Rzeszów 22 Tomasz Korol21 Abstract Thisarticleisdevotedtotheissueofassessingthecausesofbusinessfailure.Thepresentedstudies answertworesearchquestions–whatarethecausesofcorporatebankruptciesinPolandandhow tomoreeffectivelypredictthescaleofbankruptciesinthecountry.Theauthorhasconducteda studytoanalyzethespecificendogenousandexogenouscausesofcompanybankruptcydepending onthetypeofthebankruptcywithconsiderationofthethreedifferentphasesofthecrisisinenterprises.Theresearchisbasedon185companies(60bankruptand125non-bankruptfirms)listed ontheWarsawStockExchange.Foreachcompanytheauthorhascalculated14differentfinancial ratiosforeachofthesixyearsbeforeclassifyingthefirmasbankruptornon-bankrupt. TheauthorhasalsodoneresearchtoidentifyspecificmacroeconomicvariablesaffectingthebankruptcyprocessofthecompaniesinPoland.Thisprovidedspecificationofthemannerandhow stronglythevariousfactorsaffectthequantityandintensityofbankruptcyapplicationsinthisregionofEurope.Additionally,withtheuseofselectedmacroeconomicvariablestheauthorprogrammedafuzzylogicmodeltoforecastthegeneralintensityofbankruptciesinPoland.Thisstudy isthefirstattemptatusingfuzzylogictopredicttheriskofbankruptcyinamacroaspect.Theresultsdemonstratethegreatpotentialofthismethod.Thereceivedeffectivenessofthefuzzylogic modelisatthelevelof84%. 1 ThestudyhasbeenpreparedwithinthegrantprojectNo.2015/19/B/HS4/00377,„TrajectoriesoflifeandthecollapseofcompaniesinPoland andintheworld-identification,evaluationandforecast.”ResearchfundedbytheNationalScienceCentreinPoland(NarodoweCentrumNauki). 2 GdańskUniversityofTechnology,FacultyofManagementandEconomics,tomasz.k[email protected]. EVALUATION OF THE FACTORS INFLUENCING BUSINESS BANKRUPTCY RISK IN POLAND1 Financial Internet Quarterly „e-Finanse” 2017, vol.13/ nr 2, s. 22-35 DOI: 10.1515/fiqf-2016-0020 JEL classification: A10, D22, E17, G01 Keywords: financial crisis, bankruptcy causes, phases of financial crisis, fuzzy logic Received:25.05.2016 Accepted:30.05.2017
www.e-finanse.com University of Information Technology and Management in Rzeszów 23 „e-Finanse” 2017, vol. 13 / nr 2 Tomasz Korol Evaluation of the factors influencing business bankruptcy risk in Poland Introduction Thelatestglobalfinancialcrisisshowedthateventhe bestenterprisesmustconstantlymonitortheirfinancial situation.Theglobalizationprocessincreaseduncertainty intheabilityoffirmstoexist.Thenatureandstructure of the current dynamic world and linkages between all oftheworld’sfinancialandeconomicmarketsmeanthat nowadays,intimesofuncertainty,risks,andincomplete information,crisisbecomesafeatureofmodernbusiness, not a state of emergency. No company, even during aperiod ofprosperity, can becertainof itsfuture.The global financial crisis, which began in the second half of2008,causedthenumberofcompaniesindangerof bankruptcy to significantly increase around the world. Additionally,duetothesteady,structuralincreaseinthe numberofbankruptciesaroundtheworld-asaresultof increased global competition - a careful analysis of the riskofbankruptcyofbusinesseshasbecomeevenmore importanttodaythanitwasinthepast. Inmostcases,bankruptcyisa continuous process, whereitispossibletodistinguishseveral stages–from theemergenceofthefirstsignsoffinancialcrisis,through blindness and ignorance towards the financial and nonfinancialsymptomsofcrisisinafirm,toinappropriate activitiesthatleadtothefinalphaseofthecrisis,whichis bankruptcy.Thebankruptcyprocessmayeventakeupto 5-6years.Thisisnotasuddenphenomenon,impossible to predict. Therefore, the earlier warning signals are detected,themoretimemanagershaveforpreparingand reactinginsubsequentphasesofacrisis.Forthisreason, thegoaloftheauthor’sresearchpresentedinthisarticle istoanalyzethecausesofinsolvencyofcompanies,taking intoconsiderationthreedifferentphasesofcrisisandthree differenttypesofbankruptfirms.Theresearchisbased on185stockexchangelistedcompanies(60bankruptand 125non-bankrupt)fromtheyears1999-2007inPoland. Foreachcompanytheauthorhascalculated14different financialratiosforeachofthesixyearsbeforebankruptcy orbeforetheenterprisewasclassifiedasnon-bankrupt. Thesecondobjectiveofthispaperistodevelopafuzzy logic model to predict the intensity of bankruptcies intheeconomy.Suchamodelcanbeusedasatoolto evaluate the risk of doing business in the country in a macro aspect. The idea of using fuzzy logic to forecast macroeconomicriskofbankruptcyisnewintheworldof theliterature.Untilnowtheresearchershaveusedfuzzy setsonlytopredictthe riskofbankruptcyofindividual enterprises (for example: Korol & Korodi, 2011). The purposeofthismodelwillbetoidentifytheoverallrisk ofcorporatebankruptciesinthecountry(thenumberof suchbankruptciesper10000operatingenterprises).Such amodelwillenablethepredictionofnotonlytheeffect, namely the risk of bankruptcies in Poland (in annual terms), but also the very reasons affecting the number of bankruptcies (for example, level of unemployment, exchangeratesUSD/PLN,etc.). Thepaperisorganizedasfollows.Section2describes thetypicalphasesofgoingbankruptandthebasictypes of bankrupt enterprises. The author has conducted a review of more than 100 studies from around the world, presenting the latest trends in classification of this phenomenon in literature. In Section 3, the author presents the results of the research on the causes of bankruptcies of enterprises. The analyses of the endogenous and exogenous factors influencing the financialfailureoffirmsarepresented.InSection4,the author presents two econometric models. The goal of thesemodelsistodesignatethemacroeconomicvariables affectingbankruptciesinPoland.Section5isdevotedto presenttheauthor’sfuzzylogicmodelforecastingtherisk offinancialfailuresoffirmsinamacroaspect.Thelast Sectionisdevotedtoconclusions. Phases of financial crisis and basic types of bankruptcy The first author who distinguished the phases of crisisleadingtobankruptcywasP.Fitzpatrick.In1934he characterizedfivestagesofcrisisbasedonanevaluation of bankrupted American enterprises (Fitzpatrick, 1934). According to the latest trends, taking into account the increasingly globalized and dynamic environment, only 3phasesofcrisisexist.H.OogheandS.Prijckerintheir 2006studiesidentifiedthemas(Ooghe&Prijcker,2006): 1) first phase – “initial gaps” - executives make mistakesduetoalackofsufficientknowledge,skills,or experience, 2) second phase - “negative signals” - problems are further deepened as a result of an entire series of erroneousdecisions, 3) third phase - “ financial stage” - financial crisis worsensand,asaconsequence,thefirmgoesbankrupt. There are many different types of bankruptcy
Tomasz Korol Evaluation of the factors influencing business bankruptcy risk in Poland www.e-finanse.com University of Information Technology and Management in Rzeszów 24 „e-Finanse” 2017, vol. 13 / nr 2 classificationsfoundintheliterature.Theoriginalmethod of classifying failed companies into four different types of bankruptcy was proposed by three authors – B. Richardson,S.Nwankwo,andS.Richardson.Intheirstudy they used “frog” metaphors to describe the different typesofbankruptcy.Accordingtothem,theuseofsuch metaphorsmadethecharacteristicsofdifferenttypesof bankruptcy livelier and easier to remember. Thus, they characterized the following types of “frogs” or failed companies(Richardson,Nwankwo&Richardson,1994): 1) “boiled frog” – firms that have been operating inthemarketforatleastseveralyears.Acharacteristic feature of such a company is self-satisfied managers. The company is “blind” to changes in their business environment. The Executive Board inertly leads the company using old strategic, tactical, and operational plans.Hence,theanalogyto“boiledfrogs.”Theauthors givetheexampleofinsertingafrogintoboilingwater.The frogwillimmediatelyfeelthescorchingwaterandattempt tojumpoutofit.Ontheotherhand,ifthefrogisinserted intoacontainerwithcoldwaterthatisgraduallyheated toaboilingtemperature,thefrogwillshowignorance.As aconsequenceofthisignorance,thefrogwilldieinthe boilingwater. 2) “sunk frog” - firms led by highly ambitious managers who, after achieving great market successes, are strongly motivated to pursue aggressive expansion into new markets and fields of activity. Initial success andarroganceunderliethistypeofbankruptcy.Dynamic companygrowthinalldirectionscausethatatsomepoint theadditionaloperationalscopeisnotlinkedtothekey resourcesthatensuredthecompany’ssuccesspreviously. Therefore,theauthorshaveusedthesunkfroganalogy, causedbytheexcessiveambitiontotakeoveranentire pond,wantingtobeinallitspartsatonce.Thisleadsto theproverbialfroggettingexhaustedandsinking. 3) “tadpole” – unsuccessful start of a firm. This type of bankruptcy applies to young companies (hence thetadpoleanalogy,astheydiebeforetheyareableto becomeafull-grownfrog).Thereareanumberofpotential causesofbankruptcyinsuchenterprises:overlyoptimistic planningassumptionsonsales,profits,acquiringmarket share,andtheattractivenessofthefirm’sproducts,low levelofentrepreneurshipofownersormanagers. 4) “toad”–firmsoperatingforatleastadozenyears. Itaddressesmegalomaniccompaniesthatfocusalltheir time on successes achieved in the past. On the one hand, managers are megalomaniacs, and on the other hand they are apathetic to changes in their business environment. The company’s management process is basedmoreonthefaithandconvictionsofmanagersfor ongoingsuccess,ratherthanonrealanalysis.Atthesame time,suchcompanieshavegrowingambitionstoextend thebusinessinalldirections. The causes of business bankruptcies When one starts a business, thoughts are always on achieving growth and not entering the bankruptcy process.So,whydocompaniesgobankrupt?According totheliterature,itisnotpossibletodesignateonereason thatwouldbe100%responsibleforthebankruptcyofa company.Afirms’failureistheresultofawholesetof factors.Thesefactorsveryoftenoverlapwithoneanother, eveniftheirsourcesoforiginaredifferent-endogenous andexogenous. There is consensus in the literature regarding the classificationofthecausesofbusinessbankruptcies.The causesaredividedinto: 1) exogenous causes that consist of phenomena related to the overall economic situation of a country, which include the fiscal, monetary, and exchange rate policies of government authorities. Companies cannot influence these factors, however, they affect their financialsituations,suchastheirabilitytopay,liquidity, etc.Itispossibletodistinguishbothphenomenaaffecting all or almost all companies in the same way, and the phenomenathataffectonlycertainfirmsorthefactors thataffectinoppositewaysdifferentgroupsofcompanies. Aneconomicrecessionina countrycanbe givenas an example of the first group of events. An exchange rate changecanbegivenasanexampleofthesecondtypeof factorthataffectsfirmsdifferently; 2) endogenous causes, which can be divided into threemaingroups(Lizal,2005): a. the neoclassical group associated with the inappropriate, inefficient allocation of assets. From thispointofview,liquidationof an inefficientcompany positively affects the effectiveness of a country’s economy,andthebankruptcyprocesscanbelikenedtoJ. Schumpeter’stheory-“creativedestruction”, b. thefinancialgroupassociatedwithaninadequate financingstructure.Thelevelofliquidity,andappropriate andrationaluseoffinancialleverageplayaveryimportant roleinthisgroupofbankruptcies,
www.e-finanse.com University of Information Technology and Management in Rzeszów 25 „e-Finanse” 2017, vol. 13 / nr 2 Tomasz Korol Evaluation of the factors influencing business bankruptcy risk in Poland c. causesassociatedwithpoorgovernance–inthis case,abankruptcompanyhastheappropriatestructure ofliabilitiesandassets,butisnotadequatelymanaged. Managers are incompetent, and do not have adequate knowledgeand/orexperience. Table 1 presents an analysis of the causes of company failures according to the phases of crisis and type of bankruptcy. In practice there is no single type of bankrupt company. Therefore, in the opinion of this article’sauthor,itisnecessarywhenassessingenterprise bankruptcy to analyze the endogenous and exogenous causesofbankruptcyinthevariousphasesofcrisis,also takingintoaccountthetypeofbankruptcy.Itshouldbe notedthatthegoaloftheresearchistoanalyzespecific causes of bankruptcy of companies depending on the typeofbankruptcyandtakingintoaccountthedimension oftime(phasesofcrisis),ratherthanstaticanalysis,e.g. identifyingwhichofthemisthemostcommonormost important. To analyze and evaluate the roots of bankruptcy, theauthor has usedthreephasesof crisis accordingto theclassificationdevelopedbyH.OogheandS.Prijcker in 2006. The various phases of crisis are characterized bydifferentduration,and occur atdifferentstagesof a company’s “life” depending on the type of bankruptcy. Theauthorhasalsousedthreetypesofbankruptcies: 1) typeIrepresentingyoungcompaniesthathadan unsuccessfulbusinessstart, 2) typeIIrepresentsthetypeofcompaniesthathave aphaseofrapidgrowthandequallyrapiddeclinephase, 3) typeIIIrepresentsfirmsthathavebeenoperating in the market for a dozen or more years, characterized byapathyandblindnesstothechangesoccurringinthe environment. Table 1: Endogenous and Exogenous Causes of Business Bankruptcies Regarding the Crisis Phase and Type of Bankruptcy I PHASE II PHASE III PHASE I TYPE Exogenous causes Theeconomiccycle(recession) Interestrates Currencyexchangerate Inflationrate Lackofcustomers Dissatisfactionofcustomers Endogenous causes Lackofexperienceofmanagers Underestimationofthelevelofcosts Enormousfinanciallosses Inadequateknowledgeofmanagers regardingthespecificindustrysector inwhichthecompanyoperates Absenceofacostcontrolsystem Lackofpossibilityofimprovingfinancialliquidity Absenceofleadership Hugecapitalexpenses Inabilityofrestructuringthecompany becauseofthehugedebtsofthefirm, theunavailabilityofadditionalsources offinancingandincompetenceof managers Inadequatefinancialexperience Lowlevelofrevenuesfromsales Lackofcapital Absenceofbusinessplan Unsuccessfulattemptatgettingmarket share Insufficientleveloftechnicalknowledge Theincreaseoffinancialcosts Lackofkeysuccessfactors Absenceofadvisorsfromconsulting companies Haste Investmentsininappropriateprojects Lowlevelofdiversificationofproducts/markets(dependingonthesuccessofone project)
Tomasz Korol Evaluation of the factors influencing business bankruptcy risk in Poland www.e-finanse.com University of Information Technology and Management in Rzeszów 26 „e-Finanse” 2017, vol. 13 / nr 2 II TYPE Exogenous causes Theeconomiccycle Inflationrate Theincreaseofcompetitivepressure Thecollapseofthedemandforproducts Currencyexchangerate Distrustofcustomers Therefusalofbankstocontinuefinancingthecompany Endogenous causes Inadequatemanagementstructurefor increasingsizeofthecompany Overestimationofprofits Theincreaseoflossesduetounsuccessfulexpansionofthecompanyon themarket Excessiveinvestmentexpenditures Highprofitsduringfirstyearsofoperations–highoverestimationoffuture demandforproductsinconnection withplansofcompanyexpansionin themarket Inadequatefinancialexperience Unawarenessoftheproblemswith lackoffinancialliquidity Blindnessofmanagers Lackofexpertise(arroganceofmanagers) Lackofefficientfinancialcontrol Theincreaseoflevelofinventories afterunsuccessfulmarketexpansion Managers’ignoranceregardingthe distrustofcustomers Unsuccessfulexpansionofthecompany Irresponsibleincreaseofcompany debtobligations(financialleverage effect) Excessiveamountoffixedassets Lossoftrustofcustomersandemployees Excessiveoptimismofmanagers Theincreaseoflaborcosts Inadequatepricepolicy III TYPE Exogenous causes Agingindustry Theincreaseofcompetitivepressure Inappropriateeconomicpolicyofgovernment Thelackofmarketprotectionbygovernment Globalization Changeoftechnology Thelossoftrustofcustomers Endogenous causes Lackofcommitmentandmotivationof managers Thegradualdecreaseofrevenuesand profits Thelossofprofits,liquidityand solvency Thelossofstrategicadvantagedueto changesincompetitors’companies Thedecreaseofsales Theincreaseofinventories Generalapathy Unsuccessful,slowrestructureof company Specialistsdepartingfromthecompany Slowornoprocessofproductinnovation Chaosintheoperationalpartofthe company Routineinmanagement(faithandconvictionsofcompanysuccessachieved inthepast) Self-deludeofmanagers Thesearchforconsensus,avoiding radicalchanges Reluctancetoinvestinnewtechnologies Relativelylowerleverofproductquality Highleveloffixedcosts Inflexible,“stiff”processofdecision-making Sources: Self-study based on the analysis of 60 bankrupt Polish stock exchange listed companies during the years 1999-2007 and the review of literature from around the world Asgharian, 2003; Baldwin, Gray, Johnson & Proctor, 1997; Bhattacharjee, Highson, Holly & Kattuman, 2003; Brown, James & Mooradian, 1994; Carter & Van Auken, 2006; Castellanos, 2001; Dahiya & Klapper, 2007; Dyrberg, 2005; Dyrberg, 2004; Faria & Carneiro, 2001; Haswell & Holmes, 1989; Hunter & Isachenkova, 2006; Kaiser, 2001; Kash & Darling, 1998; Kleinman & Anandarajan, 1999; Koke, 2002; Laitinen & Gin Chong, 1998; Lukason & Hoffman, 2014; Nocetti, 2006; Ooghe & Prijcker, 2006; Owen, 2001; Pearce & Michael, 2006; Richardson, Nwankwo & Richardson, 1994; Sun, Li, Huang & He, 2014; Watson & Everett, 1998; Yu-Chiang & Ansell, 2007.
www.e-finanse.com University of Information Technology and Management in Rzeszów 27 „e-Finanse” 2017, vol. 13 / nr 2 Tomasz Korol Evaluation of the factors influencing business bankruptcy risk in Poland Type I Bankruptcy Responsibleforthefirstbankruptcytypearemainly endogenous(internal)factors.Thebroadcompetencesof managersplayabigroleinnew,youngcompanies.Such firmsdonothaveasolidcustomerorsupplierbase.They are vulnerable to competitor retaliation. At the same time,veryoftensuchcompanieshavelimitedaccessto financingsourcesfortheiroperations,investments,and marketingactivities,allofwhichwouldenableacquiring marketshareandmarketpresence.Inthefirstphaseof the crisis, following managerial incompetence, factors that lead to the failure of these companies can be distinguishedas: 1) poor decision-making process – lack of strong businessmanagement,longworkerwaittimeperiodsfor managerialdecisions, 2) inabilitytotakeonandcontroldifferenttypesof risk, 3) lack of general and expertise knowledge of managers in the company - managers do not have enough information and knowledge/experience about the industry in which they operate. Problems with the drafting of a proper business plan (managers are often notawareoftheneedtodevelopnecessaryissuesforthe businessplan), 4) inexperience of management, marketing, and financialexecutives, 5) weak capacity to manage a team, to resolve conflictsinteams,andcommunicatewithemployees. The result of the mentioned incompetence of managers is making poor project investment decisions and a low level of diversification of products and/or markets.Often,executivesofsuchcompaniesdependon thesuccessofonlyoneproject.Managersareexcessively optimisticaboutthesuccessoftheproject.Theydonot pay attention to the details of running the business. They want to enter the market as quickly as possible. Additionally, the inability to acquire funding leads to seriouscompanyundercapitalisation,whichalsoreduces thechanceof“appearing”onthemarket. Thefinancialcrisisdeepensduetotheconsequences oferrorscommittedinthefirstphaseofthecrisis.Thelack ofaproperbusinessplanandvisionresultsintheabsence ofanystrategicadvantageovercompetitors.Thefirmalso experiences problems attracting potential customers. Overestimated sales revenue levels, increased financial costs (when a company is unable to obtain financing sources,itwillbewillingtoacceptmoreexpensiveloans), andoftenpersistentadherencetoadecisiononcetaken (further capital expenditures on inappropriate, low profitprojects)leadstothedeteriorationofacompany’s financialsituation. In the last phase of the crisis it is already too late toimprovetheeconomicandfinancialsituationofsuch companies.Itispracticallyimpossibletoimprovefinancial liquidity. Banks refuse to finance additional business activitybecauseofthehugeshareofdebtsfinancingtotal assetsandpoorfinancialresults. Theexogenousfactorstoasmallextent(especiallyin comparisonwiththesecondandthirdtypesofbankruptcy) affect the collapse of such companies. Recession, high interest rates, high inflation, high competition, or an unfavourable exchange rate can, of course, further exacerbatethenegativefinancialandeconomicproblems ofacompany.Itshouldbenotedthatinthecaseofthe firsttypeofbankruptcy,themainsourceofproblemsisin thecompanyitself.Eveninthecaseofapositiveimpact from macroeconomic factors (for example an economic boom),suchcompaniesonlyhaveachanceofprolonging thewholebankruptcyprocessforafewyears.However, positive macroeconomic factors alone are unable to protectsuchcompaniesfrombankruptcy. Type II Bankruptcy In the case of the second type of bankruptcy, external factors have a much greater influence on the failure process than in the case of the previous type of bankruptcy. Paradoxically, initially favourable macroeconomicconditions(e.g.businesscycle,exchange rate)mayhavecontributedtotheemergenceofthefirst phaseofthecrisis,becausemanagersofthesecondtype of bankrupt companies are characterized by excessive optimism and ambitions of becoming the leading company in the market. Favourable market conditions mayonly“heatup”theirexcessiveexpectations. In the initial period these types of companies are characterizedbyveryrapidgrowth.Highprofitsreceived in the first years of a company’s existence stimulate managerstoaggressiveexpansionandatthesametimeit assuresthemoftheircorrectdecisions.Itisworthadding that,accordingtoH.OogheandS.Prijcker,thesituation of the second type of bankruptcy does not necessarily relateonlytonewcompanies.Accordingtothem,insome cases, these are companies that have been operating
Tomasz Korol Evaluation of the factors influencing business bankruptcy risk in Poland www.e-finanse.com University of Information Technology and Management in Rzeszów 28 „e-Finanse” 2017, vol. 13 / nr 2 on the market for several years, awaiting favourable economicconditions(Ooghe&Prijcker,2006).Favourable macroeconomicconditionscreateeuphoriaandexcessive optimism.Excessiveoptimismmayleadtomanagement arroganceandexpertiseonthecapitalstructure,financial plans, and future market conditions being ignored. In somecases,thereisevenalackofanyexpertise. In order to be able to finance an aggressive expansion, managers of such companies irresponsibly take large loans at a very rapid pace. The huge and fast growth in company size leads to a situation where managementstructuresbecomeinadequate.Thiscauses thecompany’sdecisionprocesstobemorechaotic.Often suchcharismatic managersprefer an autocraticstyleof management. They are reluctant to delegate authority tootheremployees,orlistentoadvice.AccordingtoB. RichardsonandS.Nwankwo,aleaderofsuchafirmtends to encircle himself with “servile clones” (Richardson et al., 1994). Nowadays, when the nature of managing a companyischaracterizedbymultidisciplinarycomplexity, managementshouldbebasedonateamofpeoplewith different skills and competences. If people surrounding the leader are of similar knowledge, it will lead to a weakening of a company’s management efficiency, which very quickly grows. Moreover, such companies oftenexpandtomarketsthatarenotconnectedtocore firm activities and are unrelated to the company and its resources. These types of investments only absorb additionalcapital. Errors committed in the first phase of the crisis inevitably lead to its second phase. During this phase, further over-investment and spending takes place. At thesametime,financialinexperience,alackofeffective financialcontrol,inappropriatemanagementstructures, staffcostincreases,andmanagerblindnesswillleadthe companytoacriticalpoint–acollapsingevent.Although therevenuesofcompaniesmaycontinuetogrow,profits fallatarapidpace(profitsdeclineduetotheincreasing financial costs, personnel costs, and cost of operating excessive fixed assets). Managers, in the conviction that declining profits are the result of a temporary deteriorationineconomicconditionsinthemarket,can evenbegintoapplythepracticeof“creativeaccounting” inordernottolosetheirprofitablebusinessimage. Furthercontinuationofafirm’s“blindness”leadsto thethirdphaseofthecrisis,inwhichthereareincreased losses and finally a loss of liquidity. Sales decreases leadtoanincreaseininventories.Onlyatthisstageare banks able to properly assess the financial situation of such companies and refuse to continue financing their activities. Itisworthpointingoutthatthistypeofbankruptcyis particularlyvulnerabletoacountry’schangingeconomic situation.Inthesituationwhenacompanyhashugedebts anduseshighfinancialleverage,acollapseindemandfor acompany’sproducts,increaseincompetitivepressure, unfavourableexchangerate,orthestartofarecessionin theeconomyhavedisastrousconsequencesandfurther aggravates the problems. It will speed up the whole bankruptcyprocess. Type III Bankruptcy Exogenouscauseshavethegreatestimpactonthe processoffailureofcompaniesthatbelongtothethird type of bankruptcy. This situation concerns companies that already have a well-established position in the market, or even companies that have had spectacular successesinthepast.Firmsthathavebeeninexistence forseveraldozensofyearsfeelsafe.Thosewhoinvestin or are employees of such companies have the opinion thattheyareguaranteedstableprofitsoremployment. Itcanbesaidthatthesecompaniesare“blinded”bythe success they once achieved. They do not analyze the changingenvironment. It can be said that routine management in combinationwithsuchexternalfactorsas: 1) agingindustryinwhichthecompanyoperates, 2) increaseincompetitivepressure, 3) increase in the number of substitutes to the productsofferedbythecompany, 4) changingproductiontechnology, 5) lackofmarketprotectionbygovernment, arethemaincausesofthebeginningofthefirstphaseof thecrisis. Apathy,lackofcommitmentandmotivationofthe leaders of such companies make them blind to gradual marketchanges.Apathytochangesleadsacompanyto losestrategicadvantagesinthemarket.Anon-existentor slowproductinnovationprocesstendstomoveexisting customers to the competition. As a consequence, the crisis in a company is exacerbated. The revenues from sales drastically decline. In the situation where there is anabsenceofdecisivecorrectiveactivitiesthecompany bankrupts. B. Richardson and S. Nwankwo explain that
www.e-finanse.com University of Information Technology and Management in Rzeszów 29 „e-Finanse” 2017, vol. 13 / nr 2 Tomasz Korol Evaluation of the factors influencing business bankruptcy risk in Poland veryoftenmanagersofsuchcompaniesprefertoexplain the decline in sales and revenues by some temporary disturbances in the market, rather than a lasting trend (Richardson et al., 1994). Managers believe that the implemented strategies that had helped them to be successful in the past will also work this time around. These managers will look for consensus rather than radicalchanges.Inconsequence,thesecondphaseofthe crisisendswiththeslowrestructuringofthecompany. The last phase is a sharp drop in profitability – especially in the case of firms producing durables. Customerswhohavenotswitchedtothecompetitionin thefirstandsecondphasesofthecrisis,nowinthefear of subsequent problems with their product service, or eventhelackofservices,resignfromfurtherpurchasesof productsfromsuchacompany.Thisresultsinanincrease of inventories, and problems with liquidity. The “nail in thecoffin”isthebestprofessionalsleavingthecompany, astheyviewthecompanyasindifferenttothesituation. In Table 1, among the external causes affecting the bankruptcy process of companies belonging to the third type of bankruptcy, there are no such factors as recession,exchangerates,interestratelevelsorinflation. In the opinion of the author of this article, companies that have already achieved market success and have been functioning over a long period of time are more “immune”tosuchfactorsthanotherfirms.Forexample, byhavingbetteraccesstodifferentsourcesoffinancing, suchcompaniesarecertainlybetterpreparedforinterest rateincreasesthancompaniesthatbelongtothefirstand secondtypeofbankruptcy. To summarize the evaluation of causes of the business bankruptcies with the use of the presented classification,it canbe saidthattheexogenousfactors, suchasglobalization,playafundamentalroleinthethird type of bankruptcy. It can also be indicated that a few oftheexogenousfactors,suchastheeconomicgrowth rate, have some role in the case of the second type of bankruptcy. In contrast, exogenous factors are of least importanceinthecaseofthefirsttypeofbankruptcy.In anytypeofbankrupcyahugeroleisplayedbyendogenous factors,becauseonecannotforgetthatakeyfactorinthis processisman–moreprecisely,hisskills,competence, knowledge,entrepreneurship,andinterdisciplinarity. Ofcourse,not allbankruptciesmustfollow oneof the above schemas. The aim of these analyses was to characterizethetypicalpatternsofbankruptcy,andnotto analyzeallpossiblepathsofbankruptcy.Also,onecannot forgetaboutsuchimportantfactorsasthedemographic characteristics of enterprises. A company’s age, size, sector–itssize,degreeofinnovation,characteristics(high techvs.lowtech)canaffectthevulnerabilityofcompanies tothecausesofbankruptcypresentedinTable1. Econometric models for macro forecasting The bankruptcy prediction has been studied extensively in financial literature for the last 51 years (since 1966 when Altman published the multivariate analysis model forecasting corporate bankruptcy risk – for example: Chen, Ribeiro, Vieira & Chen, 2013; Iturriaga & Sanz, 2015; Jardin, 2015; Lin, Liang, Yeh & Huang, 2014; Tsai, 2014). Despite the large interest of microeconomistsinthephenomenonofbankruptciesof firms,macroeconomistshavenotpaidmuchattentionto thisissue.Thus,mostmodelsdevelopedforforecasting bankruptcy are based solely on the micro level, using onlyfinancialratios.Intheopinionofthisarticle’sauthor, such a “micro” approach is obsolete in the face of the dynamicchangesandglobalfinancial crisis theworldis experiencing.Theconductedresearchallowedtheauthor todesignatethe macroeconomicvariables affectingthe increase of bankruptcy risk in Poland (both in absolute scaleandasarelativescale).Thisallowsspecificationof themannerand how stronglythevariousfactorsaffect thequantityandintensityofbankruptcyapplications.Itis noteworthythattheconstructedequationscanbeuseful toolsforthesimulationofthisphenomenon. The author has used 17 different Polish macroeconomic variables from the period 1991-2005, such as the dynamics of GDP, inflation rate, dynamics of GDP per capita, dynamics of domestic demand per capita,dynamicsofinvestment,averageannualratesof interest,reserverequirements,PLN/USDexchangerates, and unemployment rates. In both models created, the variableswereselectedbytheuseofamethoddeveloped by Hellwig. Hellwig’s method involves the selection of explanatory variables that are strongly correlated with thedependentvariable,butpoorlycorrelatedwitheach other. The first econometricmodel was estimated by the use of the ordinary least squares method. This model