Financial Stress in Indian Textile Industry-Extending the Conventional MDA Bankruptcy Model-A Study on Listed Indian Textile Companies in Bombay Stock Exchange (BSE)

Abstract

In the past two decades, the Indian Textile Industry has seen rapid changes in technology, stringent environment controls, arrival of foreign brands, manifold increase in the cost of inputs, competition from other low cost countries, labour problems and many other factors have caused unforeseen strain on its profitability and increased financial stress. There are several prominent models available through the years from earlier research studies on prediction of financial distress in companies. However, by far, the most prominent among all these methodologies remain Multiple Discriminant Analysis. In all these models, a company is clearly categorized as failed or non-failed, distressed or stable, bankrupt or solvent depending on the predicted score. But, categorizing the company as either belonging to one group or other based on discriminant score does not clearly indicate the degree or magnitude of stress or stability which the firm is currently experiencing. Financial Stress Degree Assessment Model provides a tool to assess the magnitude of stress or stability based on the discriminant scores, its squared mahalanobis distance from group centroids and posterior classification probabilities. Using the extended model, it is observed that percentage of firms moving around one degree either below or higher or equal as compared to previous year is above 80% for the first prior year and above 60% in the second prior year. Further, while as a class the financially stressed companies have remained stressed in the following years based on discriminant function scores, their degree of stress has undergone a significant change moving from low-moderate degree of stress to high-absolute state.