This paper examines macroeconomic factors affecting insolvency level in the UK construction industry.
A lagged dependent variable (LDV) model is proposed which adequately addressed the serial correlation and endogeneity problems commonly existed in time series data. Objective macroeconomic data from Q3 1997 to Q4 2023 are used to evaluate seven refutable hypotheses.
It is found that higher unemployment rate or annual interest burden leads to higher number of insolvencies, while higher construction output value or interest rate leads to lower insolvencies. Domino effect in construction insolvency is also confirmed.
The proposed solutions to the missing data on 3 quarters and the changes in the industry breakdown methods during the study period might have affected the accuracy and consistency of data.
The paper provides objective insights to factors affecting construction insolvency, offering tools for future policy formulation.
Knowing factors affecting insolvencies helps formulating solutions.
Previous studies on insolvency in construction industry have largely focused on prediction of insolvency of individual companies using firm level financial data, which are symptoms of failure rather than root causes. Studies using questionnaires could be subjective and the limited studies using macroeconomic factors often have methodological issues. This paper bridges the gap by analysing objective macroeconomic data with a sound methodology.
