Abstract
The main objective of this paper is to provide new empirical evidence on the size and determinants of the indirect financial distress costs for Malaysia’s financially distressed firms. The use data from non-financial shariah-compliant financially distressed firms is the unique contribution of this paper. The analysis used the opportunity costs as the proxy for indirect financial distress cost. The population for this research is all shariah-compliant firms classified as financially distressed under the requirement of Practice Note 17 of Bursa Malaysia. The overall sample consists of 341 observations. The average size of the cost for the period of study is 13.41%, and it ranges from a minimum value of -241.43% to a maximum value of 111.76%, indicates the existence of both cost and benefit of financial distress. The regression result suggests that the model fits the data well at the 0.05 significance level. The results of the regression also suggest firm size is the only independent variable was found to have a statistically significant relationship with the dependent variable, whereas change in investment policy, time in distress and leverage do not appear to be significantly related to the level of indirect financial distress cost.
Highlights
The results of the regression suggest firm size is the only independent variable was found to have a statistically significant relationship with the dependent variable, whereas change in investment policy, time in distress and leverage do not appear to be significantly related to the level of indirect financial distress cost
Indirect costs of financial distress (CFD), which is considered as opportunity costs (Warner 1977), refer to the costs suffered by a firm as a result of its deteriorating financial position (Elali & Trainor 2008)
The purpose of this study is to investigate the role of firm specific variables on the size of indirect financial distress costs
Summary
Indirect costs of financial distress (CFD), which is considered as opportunity costs (Warner 1977), refer to the costs suffered by a firm as a result of its deteriorating financial position (Elali & Trainor 2008). Financial distress costs were found to be a significant factor for many financing decisions , such as corporate hedging practices and trade receivable policy. Current literature related to the size and influencing factors affecting financial distress costs is very limited. This paper is novel and original given the fact there was no study conducted for shariah-compliant financially distressed firms. We argue that the findings would be different due to its unique firms (shariah-compliant) and legal characteristics
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