Abstract
Financial distress arises from excessive debt capital. The purpose of the study was to determine Altman's Z score and analyze as well as compare the effect of debt on Z scores of listed MNCs & domestic companies of Bangladesh over 24 years (1996-2019). The study was based on secondary data. Seven local companies and seven MNCs were selected as a sample from six manufacturing industrial sectors. It was found that on average one local firm was in the grey zone and the rest 13 firms were in the safe zone (Z scores>2.99). MNCs’ Z scores were significantly higher than that of domestic companies. The grand mean of the Z score of MNCs was 5.398 while that of domestic companies was 4.155. In the case of domestic companies, Z score changes by 0.01 or 0.24% for a 1% change of total debt in opposite direction. MNCs’ Z score decreases by 0.005 or 0.073% for a 1% increase of total debt. Domestic companies should increase Z score by redesigning the capital structure and improving basic earning power. The study has practical implications for corporate managers, policymakers, investors, and government because future strategy, policy, and business performance depend on the zone in which the firms are situated.
 JEL Classification Codes: G30, G32, G39.
Highlights
Financial distress is such a situation of a firm in which the financial obligations are met with difficulty
Z-Scores & Zones of Domestic Companies and Multi-National Companies (MNCs) Table 1 indicates that the mean Z scores of all local businesses was higher than 1.81, which impliesthat either firms were in the gray area or in the protected zone where bankruptcy was not probable
Significant variations are seen in companies' AAL and SPL and Z scores have decreased in recent years, but over the full duration, SPL was in a safe zone
Summary
Financial distress is such a situation of a firm in which the financial obligations are met with difficulty. According to static capital structuretheory, a firm can borrow up to that level at which marginal benefit of tax shield equals the marginal cost of financial distress (Ross, Westerfield, & Jordan 2002). There is a limit to the use of debt and after the optimum debt level cost of financial distress out weight tax shield benefit of leverage. The extreme consequence of financial distress is bankruptcy. Altman (1983) developed a model to predict bankruptcy and financial distress of firms. Using Altman’s Z score model to know financial distress or bankruptcy probability has many implications to lenders, investors, regulatory authorities, government, auditors, and managers
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