Determinants of Business Failure: A Time Series Analysis

This paper seeks to empirically analyze the determinants of the business failure rate, i.e., the proportion of businesses that fail. This issue is of obvious importance due to its ramifications for resource allocation, especially that of financial capital, physical capital, and labor. This analysis uses annual time series data for the period 1955-1989 to analyze the topic, finding that the business failure rate is a decreasing function of: the population growth rate; the inflation rate of the CPI; the per capita real income growth rate; and the growth rate of the nominal wage rate. In addition, the business failure rate is an increasing function of the nominal average interest rate yield on Moody’s Ass-rated corporate bonds. Among other things, given the impact of the Federal budget deficit upon the Moody’s Aaa-rated corporate bond rate, it would seem that deficits can indirectly lead to a rise in the business failure rate.