A Scientific Investigation into why Firms Fail: A Model of corporate health trajectory

  • Valerian Agbasonu
  • O.E. Osuagwu
Keywords: Corporate collapse, trajectories of failure, bank failure, bank distress, Z-score, hypothesis

Abstract

When has an organization failed? When legal bankruptcy occurs followed by liquidation of the firm’s assets. Why do organizations fail? This question has remained a riddle for the last two decades. Organizations that started very well and had exponential growth with added value to the economy suddenly disappears into oblivion! Several efforts have been made by scientists to identify the causes of this catastrophe. It is a disaster because once a firm fails; jobs are lost with its concomitant effects on dependants of employees who will lose their jobs. John Argenti, one of the Management Scientists, has attempted to construct the trajectory of corporate collapse. Others are Fitzpatrick (1932), Smith  1935), Horrigal (1965). Early statistical studies such as Beaver, (1968), Osuagwu (1995). In this article which is a product of PhD research in computer science, attempt has been made to scientifically identify the route causes of why companies fail. The research used modelling tools such as Gambler’s Ruin Score, BCG, Wilcox’s Probability of Ultimate Failure, Cash Flow Reinvestment Ratio, Z-Score to investigate 20 failed and successful banks. This study is significant because a proper scientific foundation on the critical success and failure factors responsible for this phenomenon will assist top management to asses early enough the likelihood of corporate collapse before this happens. The indices from the mathematical analysis were used as input to program a computer model which was tested for functionality with verifiable results. The outcome of this investigation suggests that One -man autocratic management. overtrading – doing more business than the company’s gearing can carry,inability of corporate strategist to monitor crutial stimuli in their operating environment, no sustenance of organizational culture, Demographic variables of owners is inclined to people with intent to benefit from the depositors fund without interest of the depositors in mind, insider trading and tacit fraud behaviour. The findings are in agreement with the findings of earlier research. However this study is different because advanced mathematical and statistical tools which can be verified to analyse the data of 20 banks, 10 which failed and 10 that is successful.

Key words: Corporate collapse, trajectories of failure, bank failure, bank distress, Z-score, hypothesis

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print ISSN: 1116-5405