Anticipating financial distress in monster sectors of Pakistan’s economy: an application of logit

Abstract

It’s always been worthwhile for companies to identify significant predictors of financial distress before its occurrence. This study intends to analyse the scenario of financial distress prediction by focusing on Pakistan. The sample of the study covers companies from the three biggest sectors (textile, sugar and cement)listed on the Pakistan stock exchange for the period of 2005 to 2020. The financial ratios are divided into four main categories of profitability, liquidity, leverage and asset efficiency with a total of 18 financial ratios. The results indicate that the financial ratio produced model accuracy rates of 90.11 percent for the first year prior to bankruptcy, 87.72 percent for the second year prior to bankruptcy, 85.32 percent for the third year prior to bankruptcy, 82.36 percent for the fourth year prior to bankruptcy and 79.57 percent for the fifth year prior to bankruptcy. The results also indicate that profitability, liquidity, leverage, and asset efficiency, are significant predictors of financial distress. The study provides a useful financial distress prediction model for policymakers, company managers, investors, lenders and creditors in the Pakistan stock exchange.