The effect of the Thatcher government on company liquidations: an econometric study

Abstract

The findings from an econometric study of company liquidations in teh UK economy are presented. The aim is to build on previous macroeconomic analysis of business failure in order to explore to what extent the impact of the Thatcher government did represent a clear break in the determination of company liquidations. While it is possible to construct a model which performs reasonably well in statistical terms prior to 1980, clear evidence is found of a structural break associated with the new attitude towards business failure brought in by the Conservative government. There is also strong evidence that company liquidations have become much more sensitive to the state of the business cycle. The model estimated gives a prominent role to the current level of company profitability and to the growth in liquidity. Liquidity is measured by two alternative proxy variables – the rate of growth of broad money and the flow of bank lending to the company sector. The model is consistent with a cash flow that short-term factors may have an excessive influence on the rate of company liquidation.