Determinants of Financial Distress: What Drives Bankruptcy in a Transition Economy? The Czech Republic Case

by Lubomír Lízal of CERGE-EI & the Academy of Sciences of the Czech Republic

January 2002

Abstract: The main factors influencing the probability of bankruptcy are analyzed on Czech Republic 1993-1999 firm data. Basic models of the bankruptcy are compared: neoclassical, financial and corporate governance. The corporate governance hypothesis does not receive support in the ownership but the indicator of voucher privatization supports it. The initial conditions from early 90's were not the driving the financial distress. The voucher-scheme privatization results in poorer corporate governance. These firms are more likely to go bankrupt, ceteris paribus. On the other hand, former large SOEs are less likely to bankrupt than firms with a similar debt structure - this is an evidence of soft budget constraints.

JEL Classification: P34, P31, G33, G34, P21, K2.

Keywords: Czech Republic, bankruptcy, privatization, soft budget constraint, financial distress.

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