Employing Artificial Neural Networks and Multiple Discriminant Analysis to Evaluate the Impact of the COVID-19 Pandemic on the Financial Status of Jordanian Companies

Abstract

Aim/Purpose: This paper aims to empirically quantify the financial distress caused by the COVID-19 pandemic on companies listed on Amman Stock Exchange (ASE). The paper also aims to identify the most important predictors of financial distress pre- and mid-pandemic. Background: The COVID-19 pandemic has had a huge toll, not only on human lives but also on many businesses. This provided the impetus to assess the impact of the pandemic on the financial status of Jordanian companies. Methodology: The initial sample comprised 165 companies, which was cleansed and reduced to 84 companies as per data availability. Financial data pertaining to the 84 companies were collected over a two-year period, 2019 and 2020, to empirically quantify the impact of the pandemic on companies in the dataset. Two approaches were employed. The first approach involved using Multiple Discriminant Analysis (MDA) based on Altman’s (1968) model to obtain the Z-score of each company over the investigation period. The second approach involved developing models using Artificial Neural Networks (ANNs) with 15 standard financial ratios to find out the most important variables in predicting financial distress and create an accurate Financial Distress Prediction (FDP) model. Contribution: This research contributes by providing a better understanding of how financial distress predictors perform during dynamic and risky times. The research confirmed that in spite of the negative impact of COVID-19 on the financial health of companies, the main predictors of financial distress remained relatively steadfast. This indicates that standard financial distress predictors can be regarded as being impervious to extraneous financial and/or health calamities. Findings: Results using MDA indicated that more than 63% of companies in the dataset have a lower Z-score in 2020 when compared to 2019. There was also an 8% increase in distressed companies in 2020, and around 6% of companies came to be no longer healthy. As for the models built using ANNs, results show that the most important variable in predicting financial distress is the Return on Capital. The predictive accuracy for the 2019 and 2020 models measured using the area under the Receiver Operating Characteristic (ROC) graph was 87.5% and 97.6%, respectively. Recommendations for Practitioners: Decision makers and top management are encouraged to focus on the identified highly liquid ratios to make thoughtful decisions and initiate preemptive actions to avoid organizational failure. Recommendation for Researchers: This research can be considered a stepping stone to investigating the impact of COVID-19 on the financial status of companies. Researchers are recommended to replicate the methods used in this research across various business sectors to understand the financial dynamics of companies during uncertain times. Impact on Society: Stakeholders in Jordanian-listed companies should concentrate on the list of most important predictors of financial distress as presented in this study. Future Research: Future research may focus on expanding the scope of this study by including other geographical locations to check for the generalisability of the results. Future research may also include post-COVID-19 data to check for changes in results.