Aggregate economy risk and company failure: An examination of UK quoted firms in the early 1990s

Failure risk is modelled for the very turbulent economic environment of the UK in 1989–1991 using a logit estimator augmented in the case of firms that fail by macroeconomic determinants of insolvency. We provide robust evidence that beyond the commonly observed financial statement-based determinants, shocks in the nominal interest rate and the real exchange rate are key factors in causing large firms to fail. The results suggest that policy makers and practitioners should pay specific attention to the impact of higher than usual nominal interest rates that affect firms’ capacity to roll over debt, and to high real exchange rates.