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

The number of corporate failures in South Africa fluctuates greatly over time, and thecharacteristics of these fluctuations have not been investigated sufficiently. This paperexamines the trends in corporate failures, specifically for small medium and microenterprise (SMMEs) and private companies in South Africa, with a particular focus onidentifying the dynamic features of the series and associated macroeconomic variablesmovements.We examine the interactions between corporate failures and macroeconomic aggregates,and specifically the accounts of policy-induced changes in the macroeconomy for theobserved fluctuations of South African business failures in the period 1994–2009. Thisresearch investigates both the short-run and long-run dynamic linkages betweencorporate failures in South Africa and selected macroeconomic variables by employingthe Autoregressive Distributed Lag (ARDL) bound test. Time series Error CorrectionModel (ECM) estimates suggest that macroeconomic risk factors are related to firmfailures in the same direction both in the short run and the long run, and that adjustmentto steady state path is quite quick. A regression model is also estimated with a dummyvariable included to decipher the corporate failure rates during the 2007-2009 globalfinancial crisis. The results demonstrate that macroeconomic aggregates exert differentialimpacts on corporate failures both in the short run and in the long run. The study alsoreveals that corporate failure rates in South Africa are significantly and positivelyassociated with the average lending rate, inflation rate, new corporation, exchange rate,2007-2009 financial crisis, and inversely related to gross domestic product (GDP) andmoney supply both in the short run and long-run. In general, the results show expectedand consistent relationships between shocks on economic variables and corporatefailures.