Impacts of macroeconomic fluctuations on insolvency: Case of Korean construction companies

Abstract

The performance of construction companies is closely related to the macroeconomy and is, therefore, subject to macroeconomic fluctuations. That, in some instances, can lead to their insolvency. An analysis of how macroeconomic changes affect construction companies is thus necessary. Hence, we analyzed impacts of macroeconomic fluctuations on insolvency in construction companies by establishing a vector error correction model (VECM) using macroeconomic variables. This model generates the expected default frequency (EDF) as an endogenous variable. The macroeconomic variables included were the gross domestic product (GDP), consumer price index (CPI), Korea composite stock price index (KOSPI), currency exchange rate (CER), certificate of deposit interest rates (CD), and corporate bond yield (CBY). We used the arithmetic mean value of the EDF for 25 construction companies as an index to indicate their status and found that the effects of these macroeconomic variables on the companies were different at different times. We expect these results to be useful to interested parties in the construction industry and to economists interested in creating relevant industry indicators.