Macroeconomic determinants of corporate failures in South Africa (1994-2009)
Date
2011-11-02
Authors
Masekesa, Wellington Mtombwe
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Abstract
The number of corporate failures in South Africa fluctuates greatly over time, and the
characteristics of these fluctuations have not been investigated sufficiently. This paper
examines the trends in corporate failures, specifically for small medium and micro
enterprise (SMMEs) and private companies in South Africa, with a particular focus on
identifying the dynamic features of the series and associated macroeconomic variables
movements.
We examine the interactions between corporate failures and macroeconomic aggregates,
and specifically the accounts of policy-induced changes in the macroeconomy for the
observed fluctuations of South African business failures in the period 1994–2009. This
research investigates both the short-run and long-run dynamic linkages between
corporate failures in South Africa and selected macroeconomic variables by employing
the Autoregressive Distributed Lag (ARDL) bound test. Time series Error Correction
Model (ECM) estimates suggest that macroeconomic risk factors are related to firm
failures in the same direction both in the short run and the long run, and that adjustment
to steady state path is quite quick. A regression model is also estimated with a dummy
variable included to decipher the corporate failure rates during the 2007-2009 global
financial crisis. The results demonstrate that macroeconomic aggregates exert differential
impacts on corporate failures both in the short run and in the long run. The study also
reveals that corporate failure rates in South Africa are significantly and positively
associated with the average lending rate, inflation rate, new corporation, exchange rate,
2007-2009 financial crisis, and inversely related to gross domestic product (GDP) and
money supply both in the short run and long-run. In general, the results show expected
and consistent relationships between shocks on economic variables and corporate
failures.
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Keywords
Corporate failures, South Africa