Capital Insufficiencies, Absortion Role of Management Inefficiencies and Financial Distress (or Bankruptcy) Probabilities – A Panel Data Probit Analysis from European Western Countries

Abstract

The aim of this paper is to analyze financial distress probability supported by two proxies defined by short and long term capital insufficiencies as dependent variables. The conditions under which may be explained with the scholar explanatory variable sets constituted by financing, profitability, return volatilities and flexibility in financing and assets structure. Control variables are related to firm’s trade credit policy: trade credit duration gap and trade credit risk taking associated when facing different coverage ratios. In relation to the inclusion of trade credit duration gap and trade credit risk taking associated to different coverage ratios in basic model (1) finish to eliminate return on assets, return volatilities and trade credit risk taking to coverage ratio effects on short term capital insufficiency. Another important conclusion is that short term financing withdraw to itself financial costs, trade credit duration gap ratio and trade credit risk taking ratios negative effects to deteriorate short term capital insufficiency. In turn, equity negative impact represents an important autonomous effect to meet trade-off predictions on reducing short term capital insufficiency besides decreasing its coefficient magnitude after entering trade credit variables in the basic model (1). Negative working capital acts as a complement of short term financing positive effect on the deterioration of short term capital insufficiency that contributes to increase probability of financial distress (or bankruptcy). Only trade-off predictions are present in all control models when equity presents permanently a negative impact on short term capital insufficiency. More over, the inclusion of trade credit duration gap and trade credit risk taking associated to different coverage ratios in basic model (2) presented before eliminate return on sales volatility, negative working capital and trade credit risk taking ratios more related to core business coverage ratios impacts on long term capital insufficiency. Another important conclusion is that short term financing represents now a financing substitution role that contributes to decrease long term capital insufficiency. In turn, equity impact acts as the most important autonomous effect to meet trade-off predictions on strongly reducing long term capital insufficiency after entering trade credit variables in the basic model (2). Pecking order predictions are also respected by the negative impact of return on assets on long term capital insufficiency, confirming findings that no single theories provides a complete explanation for all aspects of the data analysed. Pecking order and trade off predictions are long term well running when trade credit control variables enter in long term capital insufficiency basic model. At last, FDL and Z-core models are substantially confirmed by results of ours long term capital insufficiency model.