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Finance company failure in New Zealand during 2006–2009: Predictable failures?

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  • Douglas, Ella
  • Lont, David
  • Scott, Tom

Abstract

Over 31 finance companies (non-bank deposit takers) failed in New Zealand over the 2006–2009 period. With an estimated loss of over NZ$3 billion, there was public outcry and a parliamentary inquiry into the causes of the failures, but few have asked if this was a predictable event. We find that failed finance companies have lower capital adequacy, inferior asset quality, more loans falling due, higher earnings and lower cash flows. Furthermore, failed companies have a longer audit lag and some trustees appear to have a greater percentage of failed firms than others. Our logistic model can successfully classify failure one year before for 88.7% of companies. Our logistic model (neural network) can also correctly classify up to 87.5% (83.3%) of a holdout sample. Our results are of interest to regulators and practitioners, as we show that publicly available data could distinguish between failed and non-failed finance companies.

Suggested Citation

  • Douglas, Ella & Lont, David & Scott, Tom, 2014. "Finance company failure in New Zealand during 2006–2009: Predictable failures?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(3), pages 277-295.
    • Handle: RePEc:eee:jocaae:v:10:y:2014:i:3:p:277-295
    DOI: 10.1016/j.jcae.2014.10.002
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