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Study: Trends in business bankruptcies

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The Daily


Thursday, October 12, 2006
1980 to 2005

The rate of business bankruptcies in Canada has declined to a 25-year low, but losses resulting from failures have not, according to a new study.

The study, which analyzed data from the Office of the Superintendent of Bankruptcy Canada and Statistics Canada, found that far fewer firms are going bankrupt, but the average size of the net financial losses from bankruptcy has been rising. Recent bankruptcies have involved large liabilities.

Just over 7,300 companies went bankrupt last year, a rate of about 7 firms for every 1,000 businesses, the lowest rate in the last 25 years. This rate was less than the peak that occurred in 1992 when 15.4 firms per 1,000 businesses failed.

Financial losses associated with bankruptcy rose sharply in the early part of this decade, peaking in 2002 at more than $6.6 billion. Since then, net liabilities have declined, and in 2005, they amounted to just under $3.3 billion.

The study found that the incidence of business bankruptcy has changed greatly during the last 25 years.

The recessions and economic restructuring of the early 1980s and early 1990s were accompanied by significant increases in both the overall number of bankruptcies and the rate of bankruptcies within the business population. Bankruptcy rates peaked in 1982 and 1992.

In contrast, the economic slowdown in the early part of this decade was not accompanied by a similar increase in the rate of business failures. Rates have declined significantly from those posted in the mid-1990s.

Over the last 25 years, net liabilities from business bankruptcy have increased substantially. In 1980, the losses from bankruptcy amounted to about $479 million, which represented about 0.32% of Canada's net assets. In 2005, losses represented about 0.52% of net assets.

On a regional basis, the study showed that there has been a strong convergence in bankruptcy statistics over time. The differences in bankruptcy rates among the various regions in Canada have fallen to 25-year lows.

The most significant shift in regional bankruptcy rates occurred in Quebec. During the 1980s and 1990s, Quebec experienced much higher rates of bankruptcy than other regions.

However, Quebec's rate of business bankruptcy has declined sharply since the mid-1990s, and is now comparable to those in other regions.

In Quebec, Ontario and British Columbia, changes in bankruptcy rates over time are strongly correlated with changes in their unemployment rates, a basic indicator of the strength of their economies.

In the Prairies and Atlantic Canada, there has been a much weaker association between changes in bankruptcy rates and the unemployment rate, as bankruptcies have been influenced by specific structural shocks.

For example, the restructuring of the fishing industry in Atlantic Canada in the 1990s was accompanied by large changes in bankruptcy rates, with only modest changes in unemployment rates.

The analytical paper "National and regional trends in business bankruptcies, 1980 to 2005" is now available as part of the Insights on the Canadian Economy (11-624-MIE2006015, free) series from the Publications module of our website.

A shorter version of this article can also be found in the October 2006 Internet edition of Canadian Economic Observer, Vol. 19, no. 10 (11-010-XIB, free), that is now available.

More studies related to firm strategies and performance are available free of charge in the analytical series Update on Economic Analysis (11-623-XIE, free) on our website.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Cindy Lecavalier (613-951-2183) or John Baldwin (613-951-8588), Micro-economic Analysis Division.