Rescuing Icarus: the European Commission's approach to dealing with failing firms and sectors in distress

This study looks into the potential effect of foreign exchange exposure elasticity (FEEE) on the financial distress of non-financial firms from an emerging country (Pakistan) and a developed country (USA) during 2003-2015. It employs mixed methodology in which a comprehensive quantitative analysis is made from the panel data of the sample companies from both countries (Pakistan and USA). Subsequently, views of Chief Finance Officers (CFOs) of different companies are given. Results show that the effect of foreign exchange exposure is not statistically significant on the financial distress of Pakistani firms at contemporaneous level but it has positive significant effect at lagged level. Results also show that at gross exposure level, foreign exchange exposure of US manufacturing firms has a significantly positive effect on their financial distress contemporaneously but not at net market level. In case of US non-manufacturing firms, the foreign exchange exposure elasticity does not impact significantly on the Z-Score at gross exposure level. But the market model shows a weak significant effect of the FE Exposure on the distress of such firms in USA at relatively higher significance level. The firms fundamental attributes except foreign sales exhibit a significant effect on the financial distress. Only debt has negative coefficient which describes a positive effect on the financial distress. The findings have notable implications for the financial stability of the firms, especially in Pakistan.

Financial Distress and the Value Premium

PurposeThis study aims to analyze the effect of cognitive load and social value orientation on managers’ preferences when they face with two types of restructuring choices in financially distressed firms: the first belonging to the family of organizational restructuring (massive layoffs) and the second to the family of financial restructuring (debt increases).Design/methodology/approachThe authors investigate experimentally the impact of managers’ cognitive load and social value orientation on the decision to restructure leveraged buyout (LBO) firms in financial distress by using either massive layoffs or debt increases.FindingsBy investigating the impact of managers’ cognitive load and social value orientation on the restructuring decision of an LBO firm in financial distress, the research reveals that, on average, cognitively loaded managers prefer massive layoffs over increased debt levels. The massive layoffs seemingly provide a relatively easier way to avoid conflict with influential, residual claimants. In contrast, social value–oriented managers actively avoid massive layoffs and prefer to increase debt.Research limitations/implicationsThese results imply that the performance mechanisms emphasized to improve agency relations, for example, in LBOs, have their own limitations during periods of financial distress. This study shows that one of these limits is related to cognitive distortions and personality traits.Originality/valueIn this research, the originality lies in understanding how managers’ internal factors affect their restructuring decision-making, in the case of LBO firms in financial distress.

The firm's financial distress is an unwanted situation that needs to be overcome timely, otherwise, it leads to business failure. This study examines the influence of transparency and disclosure (TD) on financial distress (FD) using inventory as a moderator. This study used secondary data from CMIE Prowess database for the five years from 2016 to 2020 of BSE100 listed firms. This study has used the panel data analysis (PDA) method for data analysis. The result of this study states that transparency and disclosure (TD) have a negative significance on financial distress under the influence of inventory in health firms in India. The findings provide key implications for managers, and policymakers to entertain the inventory and T &D on a serious node to improve the firm's FD in the health industry. Investors should also consider inventory and T &D as important segments for the firm's FD to have informed decisions. This study contributes substantially to the existing literature to provide insights on T &D, inventory, and firm FD. There exists no such study, hence it provides novel evidence on the association of T&D with firm's FD of Indian health firms considering inventory as moderator.

This paper studies the use of supplier's trade credit by firms in financial distress. Trade credit represents a large portion of firms’ short‐term financing and plays an important role in financial distress. We find that firms in financial distress use a significantly larger amount of trade credit to substitute for alternative sources of financing. Firms that are smaller, with less market power, and with more unique products tend to use more trade credit financing when in distress. We also find that firms that significantly increase their trade payables when in financial distress, experience an additional drop of at least 11% in sales and profitability growth over the previously documented 21% average drop for financially troubled firms.

The firm financial distress and bankruptcy will result in the waste resources and investment opportunities. In this study, a sample of 210 firms operating in different studies was surveyed. Of 28 indices under study, 11 indices with the highest impact on the firm financial distress were identified using Partial Least Squares (PLS). These indices were current assets/current liabilities, current assets/total assets, working capital/sales, sales/inventory, sales/receivables, net income/liabilities, receivables/liabilities, net income/sales, total liabilities/total assets, total liabilities/equities, and current liabilities/equities. It was also shown that all independent variables had a significant relationship with the financial distress. In addition, the firm financial distress was predicted using the mixed method of Support Vector Machines (SVM) and the simple method (simple SVM). The results of the paired samples t-test suggested that the mixed SVM is more accurate than the simple SVM in predicting the possibility of the financial distress. It was also noted that the mixed SVM is not only more accurate but also has more generalizability power than the simple SVM.

This study examines the use of trade credits by firms that are in a state of financial distress. Trade credit is short-term financing that can be useful for firms in financial distress. The purpose of this study is to analyze the effect of financial distress on trade credit. The study sample was taken from non-financial firms listed on the Indonesian Stock Exchange (IDX) from 2007 to 2016. The research method is panel data regression by using the estimation model of the fixed-effect model and random effect. This study found that firms in financial distress tend to increase the use of trade credit. This is reflected from the results of research showing the positive and significant coefficients on the variable financial distress on the ratio of trade payable to the cost of goods sold and the ratio of trade payable to equity. Based on the results of the study it can be explained that firms that are in a state of financial distress have a larger current liability, its source from short-term financing.

Equity Returns for Dividend-Paying and Non-Dividend Paying Firms

Financial Distress and the Credibility of Management Earnings Forecasts

Reconceptualizing entrepreneurial exit: Divergent exit routes and their drivers

Sustainable growth rate defines the rate at which a company’s sales and assets can grow if the company sells no new equity and wishes to maintain its capital structure. The traditional formula assumes that the firm can increase its indebtedness. Many private firms and most firms in financial distress have limited or no access to debt markets. While distressed firms may prefer a no growth strategy, external pressures such as inflation or demand increases may cause their sales to rise exogenously. A new sustainable growth rate formula is developed that describes how much growth the firm with no new debt capacity can endure.

This chapter examines the role of main banks in the governance of firms in financial distress, based on evidence from the high growth period in the 1960s. The main bank system efficiently handles the problems of firms in distress. When they intervene, they do so quickly and effectively; their intervention is targeted, selective, and appropriate. Protracted disruptive creditor disputes are rare, since main bank support maintains the intangible asset base of the firm.

Relationship Lending and Loan Performance

Japanese firms in financial distress and main banks: Analyses of interest-rate premia

In relative valuation peer groups of comparable companies are essential to derive the value of the firm. Valuing a target firm that is in financial distress by using a set of healthy peer group firms probably leads to an overvaluation. We examine whether the financial distress risk has an influence on a company’s value and quantify the discount through financial distress. We identify financial distress by Standard and Poor’s long-term issuer ratings and Altman’s z″-score. We then match the identified firms in financial distress with healthy counterparts that are comparable in value relevant characteristics, i. e. profitability, risk, and growth, to estimate the percentage difference in valuation multiples. Using rating information, in every year almost half of the companies are in financial distress whereas by Altman’s z″-score about 20% of the companies in the sample are in financial distress. We find that the discount caused by financial distress makes up about 4–7% of firm value. The discount increases for lower rating classes and lower z″-scores. Besides the degree of financial distress, market downturns as the financial crisis affect the distress discount.