Bankruptcies, Indebtedness and the Credit Crunch

The main purpose of a bankruptcy is to settle accounts with creditors and to establish a market value for the company as a whole. This paper deals with Finnish bankruptcies. It shows that bankruptcies are strongly related to the business cycle and that they are perhaps even more strongly related to indebtedness, real interest rates and asset prices. The importance of these financial factors probably increased when the financial markets were liberalized in the early 1980s. Although there is a lot of seasonal and cyclical variation in bankruptcies the long run level (especially when adjusted to the number of firms) is almost constant representing some sort of “a natural rate of bankruptcies”….

Author: Kari Takala,Matti Viren

Source: Research Discussion Papers, Bank of Finland

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