Predicting the Frequency of Large Public Company Bankruptcies

From 1980 to 2010, the number of large corporate bankruptcies in the U.S. spanned the gamut from five in 1981 to ninety-seven in 2001. In 2009, there were ninety-one large corporate bankruptcies. Past researchers have used firm-specific characteristics to predict the likelihood of bankruptcy for a given firm. However, limited research exists regarding which factors can explain nationwide fluctuations in the number of large corporate bankruptcies. Because macroeconomic variables pose systematic risk for all firms, macroeconomic variables’ yearly variations could shed light on bankruptcy filings’ yearly variations. Moreover, utilizing lagged variables, using the prior year’s change in a macroeconomic variable, can predict the current year’s change in bankruptcy filings. This Article will show: (1) a positive relationship between the current year change in the number of large corporate bankruptcy filings and a prior year change in AAA bond yields, aggregate dollar value of corporate bonds issued, and M2 money supply; (2) a negative relationship between the change in current year large corporate bankruptcy filings and the change in current year gross domestic product, prior year unemployment rate, and prior year fixed capital assets; and (3) together with current year GDP change, lagged changes in AAA bond yields, unemployment rate, private fixed assets, aggregate dollar value of corporate bonds issued in a given year, and M2 money supply explain 71% of the variation in large corporate bankruptcy filings.