Firm Heterogeneity and Corporate Financial Distress

Abstract

Episodes of financial distress are examined using firm-, market- and macro-level information. Mixed logit regressions reveal that accounting ratios and macroeconomic variables explain the likelihood of financial distress in publicly listed firms in the Philippines during the period 1995 to 2015. Among the accounting indicators used, and across several definitions of financial distress, leverage ratios have the most influence on the state of the firm. Allowing the parameter associated with each observed variable to randomly vary to account for unobserved firm heterogeneity improves the estimates and the predictive ability of the models. The variability of the coefficient of the short-term leverage ratio, which indicates that firms have different attitudes with respect to the profitability-solvency risk trade-off, is found to be one of the significant determinants of financial distress likelihood. It is also shown that accurate econometric measurement does not necessarily lead to accurate forecasts.