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Purpose: The aim of this study is to show how long-term trajectories of enterprises can be used to increase the forecasting horizon of bankruptcy prediction models. Design/Methodology/Approach: The author used seven popular forecasting models (two from Europe, two from Asia, two from North America and one from Latin America). These models (five multivariate discriminant analysis models and two logit models) were used to develop 17-year trajectories separately for non-bankrupt enterprises and those at risk of financial failure. Findings: Based on a sample of 200 enterprises, the author evaluated the differences between non-bankrupt and bankrupt firms in development during 17 years of activity. The long-term usability of the models was demonstrated. To date, these models have been used only to forecast bankruptcy risk in the short term (1–3 years’ prediction horizon). This paper demonstrates that these models can also serve to evaluate long-term growth and to identify the first symptoms of future bankruptcy risk many years before it actually occurs. Practical Implications: It was proven and specified that long-term developmental differences exist between non-threatened and future insolvent companies. These studies proved that the process of going bankrupt is very long, perhaps even longer than the literature has previously demonstrated. Originality/value: This study is one of the first attempts in the literature globally to assess such long-term enterprise trajectories. Additionally by implementing a dynamic approach to the financial ratios in the risk-forecasting model let visualize the changes occurring in the company., peer-reviewed

Purpose: The paper presents an investigation of the bankruptcy of companies listed on the Warsaw Stock Exchange using the Fundamental Power Index in dynamic terms (FPI). Design/Methodology/Approach: The methodology of the Fundamental Power Index (FPI) was used to assess bankruptcy. In general, the essence of the indicator is a synthetic assessment of the company's fundamental strength. The indicator can take high and low values. The appearance of low levels of the ratio for the company is not favourable and indicates a problem in the financial standing area. As a consequence, the level of the ratio may signal a risk of bankruptcy. The article also discusses the legal grounds for bankruptcy of companies in Poland and selected EU countries. Findings: The results of the conducted research indicate that FPI may be a useful tool of early warning against bankruptcy. The dynamic approach to the index allowed for the assessment of the fundamental strength of the companies in the period of five years. At the same time, the level of the index indicated the risk of bankruptcy. The basis for the construction of the ratio was the financial data from the financial statements of the examined entities. In particular, information on financial ratios from the following groups was used: liquidity, profitability, debt and operational efficiency. Practical Implications: The implementation of the indicator concerns many areas, including investing, assessment of companies or the stock market. In the event of bankruptcy, information about the level of the ratio may support the management process of the company and early response of managers to avoid bankruptcy (e.g. by introducing recovery or restructuring programs). For the investor, the information about the low level of the ratio is a signal for actions related to risk management. Originality/Value: The results of the study reflect the applicability and effectiveness of the proposed indicator. Consequently, the fundamental strength index may constitute an alternative to the existing methods of assessing the bankruptcy process in enterprises., peer-reviewed

Purpose: The objective of this paper is to propose the new indicator of bankruptcy law severity for debtors (BLSI-Bankruptcy Law Severity Index). On the basis of this index we conducted comparative analysis of debtor/creditor friendliness of bankruptcy laws among 27 selected countries. Design/Methodology/Approach: In the research the following methods were used: analysis of legal acts, literature review and expert method. Findings: The empirical results show that the most debtor-friendly bankruptcy and restructuring laws are those of the USA, Ireland and Canada. At the opposite pole were Slovenia, Australia and Austria. It can also be noted that many EU countries have a similar level of BLSI measure, which is most likely a consequence of harmonisation activities undertaken within the Community. Practical Implications: The conducted research enables us to propose the direction of changes in bankruptcy and restructuring laws in the next stage. Originality/value: On the basis of proposed BLSI, we will be able to examine the relationship between the severity of bankruptcy law and innovation, entrepreneurship and the level of development of financial markets in the studied countries., peer-reviewed

Purpose: Filling the cognitive gap in the theory of ex-post transaction costs, i.e., at the stage of enforcing market transactions by examining the relationship between friendliness/severity of the bankruptcy and restructuring law towards debtors, the level of development of financial markets, the effectiveness of the judicial system and the rate of debt recovery. Design/Methodology/Approach: In the research, the following methods were used: literature review, cluster, and panel analysis. Findings: Based on the research, the existence of a statistical relationship was proven between the effectiveness of bankruptcy systems (measured by the recovery rate) and factors characterizing the level of development of the financial market as well as the severity of bankruptcy law towards debtors and the effectiveness of the judicial system. Practical Implications: Research shows that the development of the financial market, and the debt market, in particular, forces countries to put more emphasis on the effectiveness of judicial systems and to create more stringent bankruptcy laws for debtors (more creditor-friendly). Originality/value: This is the first study of its type. In the next stage of the research, the authors want to additionally include such variables as the type of the legal system (statutory law vs. common law) and its origin, the form of organization of the financial market, and at the same time, the banking system model (the Anglo-Saxon and continental models), the effectiveness of conducted restructuring measures, the level of development of countries., peer-reviewed

Purpose: The article deals with banks' vulnerability to insolvency. We discuss the impact of the CoCo write-down/write-up bonds issuance on the bank solvency. Such instruments absorb losses in two ways: 1) When a bank gets in trouble, the payment of interest is ceased, and 2) If the financial standing of the bank further deteriorates, its CoCo bonds are written down. Reversing it, when the bank solvency improves, the CoCos are gradually written up, and the payment of interest is restored. The investment in the CoCo bonds is risky. That is why they offer a greater interest rate than straight bonds. Hence there is a trade-off: loss absorption versus profitability. Design/Methodology /Approach: As a measure of insolvency, we consider the probability of the implementing resolution process, i.e., as it is called in actuarial sciences, the probability of ruin. Findings: We show that depending on the CoCo bonds' profitability, the additional issuance of the CoCos may reduce the probability of ruin. In this respect, we propose a theoretical explanation for the optimum share of CoCos in an institution's liabilities. Practical implications: Our findings may give the supervisory authorities a useful tool to determine the fair share of Additional Tier One (AT1) CoCos to fill the Pillar 2 bank capital layer. The model proves to be useful for setting the optimum size of Restricted Tier One (RT1) CoCos in the insurer's liabilities as well. Originality/value: The science lacks theoretical background for CoCos' optimal size in issuers' liabilities. Besides, we provide a new measure of bank insolvency. Contrary to the typical approach with a finite time horizon, we choose the default probability at any moment in the future as a measure of insolvency., peer-reviewed

Purpose: Attitude assessment of Polish and Portuguese managers towards the problem of compliance following the sustainable development principles in the context of running, and above all, the company's survival. Methodology: The research was conducted on a group of 200 randomly selected managers (presidents, board members, financial directors, company owners) from Poland and Portugal (100 people from each country), using the computer-assisted telephone interviewing method. Findings: Portuguese managers put survival in the first place rather than its activities following the principles of sustainable development; in Polish respondents, this indicator is more even. Failure to comply with the principles of sustainable development can be a significant cause of business bankruptcy. State aid for enterprises in crisis cannot be unconditional but dependent on their economic, financial situation, or importance for the economy. Practical Implications: The importance of responsibility for the observance of sustainable development principles and the company's survival showed that the continuation of the company's operations is still a priority for managers. Sustainable development principles should also be redefined every few years, considering the new ecological and climate threats, health issues, and economic crises. Originality/Value: Unique research of Polish and Portuguese high-level managers on the issue of their responsibility for the survival of enterprises or the company's operations following sustainable development principles. Their attitude to the occurring crises and their impact on enterprises' further functioning and finally state aid for bankrupt companies., peer-reviewed