Macroeconomic determinants of corporate failures in South Africa (1994-2009)

Masekesa, Wellington Mtombwe
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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.
Corporate failures, South Africa