Critical factors for insolvency prediction: Towards a theoretical model for the construction industry

Alaka, Hafiz A.; Oyedele, Lukumon O.; Owolabi, Hakeem A.; Oyedele, Azeez A.; Akinade, Olugbenga O.; Bilal, Muhammad; Ajayi, Saheed O.

Abstract

© 2016 Informa UK Limited, trading as Taylor & Francis Group. Many construction industry insolvency prediction model (CI-IPM) studies have arbitrarily employed or simply adopted from previous studies different insolvency factors, without justification, leading to poorly performing CI-IPMs. This is due to the absence of a framework for selection of relevant factors. To identify the most important insolvency factors for a high-performance CI-IPM, this study used three approaches. Firstly, systematic review was used to identify all existing factors. Secondly, frequency of factor use and accuracy of models in the reviewed studies were analysed to establish the important factors. Finally, using a questionnaire survey of CI professionals, the importance levels of factors were validated using the Cronbach's alpha reliability coefficient and significant index ranking. The findings show that the important quantitative factors are profitability, liquidity, leverage, management efficiency and cash flow. While important qualitative factors are management/owner characteristics, internal strategy, management decision making, macroeconomic firm characteristics and sustainability. These factors, which align with existing insolvency-related theories, including Porter's five competitive forces and Mintzberg's 5Ps (plan, ploy, pattern, position and perspective) of strategy, were used to develop a theoretical framework. This study contributes to the debate on the need to amalgamate qualitative and quantitative factors to develop a valid CI-IPM.

Citation

Alaka, H. A., Oyedele, L. O., Owolabi, H. A., Oyedele, A. A., Akinade, O. O., Bilal, M., & Ajayi, S. O. (2017). Critical factors for insolvency prediction: Towards a theoretical model for the construction industry. International Journal of Construction Management, 17(1), 25-49. https://doi.org/10.1080/15623599.2016.1166546

• Journal Article Type: Article
• Acceptance Date: May 10, 2016
• Online Publication Date: May 10, 2016
• Publication Date: Jan 2, 2017
• Deposit Date: Apr 5, 2017
• Publicly Available Date: May 10, 2017
• Journal: International Journal of Construction Management
• Print ISSN: 1562-3599
• Electronic ISSN: 1562-3599
• Publisher: Taylor & Francis
• Peer Reviewed: Peer Reviewed
• Volume: 17
• Issue: 1
• Pages: 25-49
• DOI: https://doi.org/10.1080/15623599.2016.1166546
• Keywords: construction industry, insolvency prediction model, construction industry insolvency factors, financial ratios, failure
• Public URL: https://uwe-repository.worktribe.com/output/900626
• Publisher URL: http://dx.doi.org/10.1080/15623599.2016.1166546
• Additional Information: Additional Information : This is an Accepted Manuscript of an article published by Taylor & Francis in International Journal of Construction Management on 10 May 2016, available online: http://www.tandfonline.com/10.1080/15623599.2016.1166546