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This thesis is motivated by the fact that small and medium sized enterprises (SMEs) are of vital importance to most European countries collectively, and to each country individually. For these reasons, understanding SME failure is an integral part of decision and policy making. Firm failure can be regarded as a multi-year process that develops over time. Yet there has been limited work in the area of quantitatively identifying and analysing SME failure processes. In particular, despite evidence from the qualitative firm failure process literature on the importance that non-financial, firm-specific characteristics have on firm failure processes, the quantitative firm failure process literature has largely ignored this aspect. Likewise, the determinants of firms' transition to failure within potential alternative firm failure processes and the importance of geographical location are often overlooked in the firm failure process literature, despite evidence in the wider firm failure literature for the contrary. For these reasons, the current evidence in the quantitative firm failure process literature is quite isolated from wider firm failure studies. This thesis aims to investigate alternative SME failure processes, the determinants of firms' transition towards failure and the importance of firms' geographical location by bringing evidence from other parts of the firm failure literature in the quantitative study of firm failure processes. The sample analysed consists of SMEs in eight EU countries, covering the period from 2004-2013. In addition to analysing the whole sample, the failure processes and failure determinants of UK failed SMEs are also investigated. The dataset of this study covers firm-specific characteristics - such as financial ratios and directors' characteristics - and information about the macroeconomic and business environment. In addition, the impact of geographical location is considered. The key results of the analysis identify the existence of four alternative firm failure processes (new firms with inexperienced boards, high growth firms, old firms, firms without board diversity) which apply across EU countries and UK regions. A number of other characteristics are also present in the alternative firm failure processes: directors characteristics are of primary importance for firm failure processes as well as firms' transition to failure. So are the age of the firm, the legal tradition of the country, the levels of business growth and the intensity of competition due to new business entrants in an area and the geographical location of firms. There are a number of contributions that this thesis makes to the quantitative firm failure process literature. First, given that the different failure processes were found to have differing determinants, the results show the importance of looking at individual firm failure processes rather than simply analysing all failed firms together. Second, this thesis is the first to quantitatively analyse the impact of directors' characteristics in the identification of the alternative firm failure processes in EU and UK firms. Third, it is the first study to investigate the determinants of firms' transition to failure within the alternative firm failure processes context where both financial distress and liquidations are considered in the definition of failure. Fourth, this thesis identifies the importance of geographical location and the existence of spatial interactions in some parts of firms' transition to failure. As such, this thesis consolidates and analyses evidence from qualitative firm failure process studies and from wider firm failure studies in the context of quantitative firm failure process. In doing so, it applies spatial panel data analysis for first time in a firm failure process study. A number of policy implications result from these findings. Given the differences in firm-specific characteristics, the differences in the determinants of transition to failure and the geographic sensitivities that the alternative firm failure processes have, policies and decisions designed to support SMEs to avoid failure should be more targeted according to the characteristics of the firm and the process towards failure with which it is mostly associated. |
