Is the threat of a bankruptcy wave smaller than expected?
A preliminary analysis by Helsinki GSE’s situation room however supports the view that if there are bankruptcies that have been postponed due to new legislation, the number of them may be less than what can be directly observed through statistics on bankruptcies.
There has been broad public discussion on the impact of the pandemic on the number of bankruptcies. A model developed by GSE indicates that the number of bankruptcies in 2020 as compared to, for example, 2019 cannot be fully explained by the fact that bankruptcies have been postponed due to legislative changes. This conclusion is based on comprehensive, monthly statistics of companies. Furthermore, the model has taken into account sales over the past three months, how sales have changed, as well as wage costs and the changes in them. The previously presented difference between 2020 and earlier years, calculated directly from statistics on bankruptcies, may be an exaggeration of the number of missing bankruptcies.
"It is possible that the threat of a wave of bankruptcies is less than expected, however, we must take into account that our analysis is preliminary. A more in-depth review can reveal new results. For example, the statistics from February show an increase in the number of bankruptcies. If this development continues, there is a risk that we will experience a wave of bankruptcies. A factor that it worth paying attention to going forward is when companies withdraw from the marketing without declaring bankruptcy", says GSE's Academic Director Otto Toivanen.
The number of companies that ceased operations increased by 13 percent during April to June 2020, as compared to the same period in 2019. During 2020, about 500 fewer bankruptcies were made as compared to the two previous years before the crisis. One possible explanation for the low number of bankruptcies is the changes that were made to the Bankruptcy Act in May 2020, which made it more difficult for creditors to drive companies into bankruptcy.
"Bankruptcies are part of a functioning market economy and a part of the renewal of the economy. As a result, companies with low productivity that lack business conditions disappear from the market. Even if it has been justified to support companies during these exceptional times, there is no reason to avoid bankruptcy indefinitely even during a pandemic", Professor Ari Hyytinen, member of the research group, highlights.
The question is whether we can expect a large wave of bankruptcies at a later time, and what a possible increase in the number of bankruptcies implies. The preliminary results that have now been published indicate that the number of bankruptcies will be smaller than expected.
You can familiarize yourself with the report at www.helsinkigse.fi
The Situation Room is a research group consisting of over 20 researchers from different fields of Economics, founded in collaboration between VTT and the Helsinki Graduate School of Economics (Helsinki GSE). Researchers from the University of Turku, VATT, the Institute for Health and Welfare and Statistics Finland also participate in the Situation Room. The situation room uses government reports from, among others, FPA, Statistics Finland, ministries and the tax authority. The situation room has been established to produce information that can support fiscal policymaking of ministries and other public bodies during the coronavirus crisis. The reports can be read at helsinkigse.fi.
Helsinki Graduate School of Economics is a top-level research unit founded in collaboration between Aalto University, Hanken and the University of Helsinki to educate, produce high-quality research and benefit society both nationally and internationally.