Financial Distress Condition Research Articles

Financing, fire sales, and the stockholder wealth effects of asset divestiture announcements

We examine the impact of financial distress conditions at the individual firm level, the operating industry level, and economy-wide, on the stock price reaction to divestment announcements. This allows us to isolate distinct fire sale and financing theoretical explanations of asset divestments. We find that abnormal returns are significantly lower when firms divest assets during periods of industry-wide distress. During these periods the natural buyers of the divested assets are likely to have liquidity constraints, and so selling firms receive a lower price (Shleifer and Vishny, 1992). Fire sale effects from divestments are driven by financially constrained firms, firms selling core assets, small firms, and increase with deal size. We find some support for the financing explanation of the stock price response to divestments during periods of overlapping firm-level and economy-wide financial distress conditions, suggesting that divesting assets reduce the expected value of bankruptcy costs for selling firms under these conditions.

A Liquidity Index

The recent financial crisis reignited concerns about systemic risk in the financial industry. For the first time, systemic risk was caused by a lack of liquidity in the marketplace. To deal with this newly revealed systemic risk, researchers have developed various quantitative indicators. Despite successful empirical results, these indicators are mainly empirically based and are not capable of differentiating liquidity risk from other sources of risk, such as market and credit risks. In this article, the authors develop a liquidity index to measure the systemic risk caused by liquidity distress in the financial market. The index is based on a parsimonious model that has a semi-closed-form solution to compute a discount due to illiquidity. The model can be used to distinguish liquidity default from economic default (solvency). The authors construct their liquidity index using stocks in Standard & Poor’s 1500 financial sector index over the January 1996–December 2013 period. This liquidity index then can be used for various systemic risk analyses. They discover that there is large variation among banks in their liquidity health, that large banks suffer more liquidity discounts than smaller banks, but only a portion of banks suffered severely during the crisis. Using measured liquidity discounts, the authors relate their index to several financial variables used to represent financial distress or economic conditions in the academic literature.

ANALISIS LAPORAN KEUANGAN DENGAN MENGGUNAKAN RASIO CAMELS SEBAGAI ALAT UNTUK MEMPREDIKSI KONDISI FINANCIAL DISTRESS BANK UMUM YANG TERDAFTAR DI BEI

This research analyzed the influence of the ratio of CAMELS on the symptoms of financial distress of commercial banks listed on the Indonesia Stock Exchange between 2007 until 2009. Data that used in this research is financial statement and independent audit report from each company that published on website www.idx.co.id. Sampling method that used in this research is purposive sampling method. Analysis model that used is multiple regression analysis. The result of this research indicates that the Capital Adequacy Ratio, Assets Quality 1, Operating Expenses / Operating Income and Loan to deposit ratio does not significantly influence the financial symptoms distress. Meanwhile Good Corporate Governance and Net Interest Margin significant effect on symptoms of financial distress. Keyword: capital adequacy ratio, asset quality 1, good corporate governance, the net interest margin, operating expenses to operating income, loan to deposit ratio, financial distress condition

Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households

We investigate household financial fragility in Italy, providing three main contributions. First, we propose a novel characterization of financial fragility that is not necessarily linked to indebtedness, distinguishes between expected and unexpected expenses, takes portfolio composition into account, and is free of subjectivity bias. Second, we use it to assess the importance of household portfolio composition for determining the difficulties related to coping with unexpected expenditures, besides socio‐economic and demographic factors. Third, we test its ability to forecast future conditions of financial distress. The empirical analysis is based on the Bank of Italy Survey on Household Income and Wealth. The results highlight the relevance of portfolio choices as determinants of financial distress, that is, they provide evidence that homeownership increases the likelihood of financial fragility while the presence of a mortgage decreases it. Moreover our measure is shown to act as an early warning indicator of distress.

ANALISIS RASIO-RASIO KEUANGAN UNTUK MEMPREDIKSI FINANCIAL DISTRESS BANK DEVISA PERIODE 2006 – 2011

There are some studies describing prediction models of banks bankruptcy, but only few have sought to predict banks financial distress which happens before bankruptcy. This study examines the factors affecting financial distress condition of foreign banks in the periods of 2006 2011. The tested factors are the changes of median value of Equity, the changes ofmedian value of Net Interest Margin and the changes of median value of Return on Equity. Variables used in this study consist of CAR, NPL, ROA, NIM, ROE, LDR, and IRR. The sample consists of 166 banks categorized as foreign banks in Indonesia in the periods of 2006 2011, collected by purposive sampling. The logistic regression was used for analyzing the data and backward stepwise technique is used to gain a model that has the highest classification power, by removing the most insignificant variable in a model. The results show that Return on Asset (ROA), Return on Equity (ROE) and Net Interest Margin are significant variable. The insignificant variables are CAR, NPL, LDR and IRR. This research also indicatesthat not all the variables tested can predict the financial distress of foreign bank.

THE RELEVANCE OF ACCOUNTING INFORMATION AND FINANCIAL DISTRESS OF LOCAL GOVERNMENT IN EAST JAVA

Financial distress is an inability of local government to give public services appropriate with minimum standards of service caused by lack of funds. This condition is a negative signal of local government because reflects bad government’s performance. The aim of this research is examining accounting information relevance to financial distress of local government in East Java. Accounting information relevance is measured by ROA, POSGW, PERGW, CLGW, CL and DTR. Whereas, local government’s financial distress is measured by DSCR based on the decree issued by the government No. 54 year 2005 concerning regional loans. The sample of this research is local government in East Java both counties and cities. Census method is used to collect the samples because every element in the population is used as samples. Pearson’s correlation product is used to analyze the data. The statistical test result shows that POSGW, CLGW, CL and DTR have a strong enough relationship and unidirectional to DSCR. This result is in line with agency theory which states that local government will seek to minimize financial distress condition by optimizing their financial performance. It can be concluded that accounting information relevance has a relationship to local government’s financial distress.

ANALISIS RASIO KEUANGAN UNTUK MEMPREDIKSI KEMUNGKINAN FINANCIAL DISTRESS

Purpose of this research is Is to know the ratio of financial performance, the ratio of financial position, the ratio of efiseinsi, and the ratio of debt can affect simultan or partial in forecasting the condition of financial distress in the local goverment in Central Java.This research using a sample of as much as 31 city/district local government in Central Java were sourced from the balance sheet Budget Report and the realization of the income and Expenditure Budget (BUDGETS) in 2010. A method of the sample uses the method purposive of sampling. This research tool used logistic regression.The results showed that the variable of financial performance ratio, variable of financial position ratio , variable of efficiency ratio,and variables of debt ratio affect the possibility of simultan financial distress. In a partial the ratio of the financial position of affect the possibility of financial ditress, the ratio of efficiency affect the possibility of financial ditress, and ratio of debt affect the possibility of financial ditress. But the ratio of financial performance not affect the possibility of financial ditress.

PREDIKSI FINANCIAL DISTRESS DENGAN RASIO ARUS KAS

This research examine financial ratio of cash flow to predict financial distress. This research argues cash flow ratios have an effect on financial distress condition especially for Indonesian firm. There are 13 cash flow ratios from 17 listed manufacturing firms in Indonesia Stock Exchange (IDX). Period of analysis is 1999-2005. The classification of financial distress firm based on Almilia (2006) that divide firm which financial distress has a negative net income and net equity for 2 years consecutively. This research uses logistic regression to conclude the predictability power of research model. Result shows cash flow ratios have a significance affect on financial distress, such ratios are CFFOTA, CFFOS, IPPEPPE, CHWCTU, RPPETS, DITS and NetdebtTS.

Analisis faktor-faktor yang mempengaruhi kondisi financial distress suatu perusahaan yang terdaftar di bursa efek Jakarta

There is abundant researches describing prediction models of firm’s bankruptcy, but only few researches have sought to predict firm’s financial distress. The financial distress condition happens before bankruptcy. The purpose of this research is to examine the factors that affect financial distress condition of a firm. The factors that are examined on this research are financial ratio, industry relative ratio, firm’s sensitivity to macroeconomic variables, auditor reputation and underwriter reputation. The sample consists of 19 companies which were delisted from 1999 through 2002 and 41 listed companies until 2002. The sample are selected using purposive sampling approach. The statistic method which is used to test on the research hypothesis is logistic regression. Backward stepwise technique is used to gain a model that has the highest classification power, by removing the most insignificant variable in the model. The results show that industry relative ratio has a higher classification power rather than unadjusted financial ratio. This research also indicates that a firm’s sensitivity to macroeconomic variables (IHSG, General Consumer Price Index, Money supply and SBI interest rates) and auditor reputation is a significant variable in determining of companies’ financial distress.

Auditors’, bankers’ and insolvency practitioners’ “going‐concern” opinion logit model

“Going‐concern” opinions are judgemental and therefore fraught with numerous problems. The inability to establish the “correctness” or otherwise of the “going‐concern” opinion decision has also been puzzling practitioners throughout the years. Exploratory interviews revealed that a “going‐concern” opinion decision involves not only auditors but also bankers and insolvency practitioners particularly under conditions of financial distress. The purpose of this paper is to determine the factors influencing “going‐concern” opinion decisions of auditors, bankers and insolvency practitioners (IPs) for financially distressed client‐firms. Using data collected via a postal questionnaire, a logistic regression model is developed with an overall correct classification of 81.11 per cent. The model uses indicators of “going‐concern” uncertainties and events/action triggers that invalidate the “going‐concern” status of a financially distressed firm. Further research examining the impact of other (behavioural) factors is required but also highlighting any differences between these three professional user groups of company accounts.

A comparative analysis of layoff announcements and stock price reactions in the United States and Japan

Downsizing and layoffs are an important mechanism for U.S. firms to cope with their strategic and economic environment. In contrast, the Japanese tradition of lifetime employment limits the ability of firms to employ layoffs as a strategic measure, relegating its use to conditions of financial distress. This paper provides the first comparison of layoffs in Japan and the United States and examines stock price reactions to layoff announcements in each country from 1990 to 1994. Agency theory and Aoki's cooperative game theory are employed to discuss differences in the governance structures of U.S. and Japanese firms and their implication for stock price reactions. Results show that layoff announcements trigger negative returns for both U.S. and Japanese firms. Specifically, layoff announcements of U.S. firms are associated with a negative 1.78 percent abnormal return, while layoff announcements for Japanese firms are associated with a negative 0.56 percent abnormal return. To better understand the impact of layoffs, this study examines the relationships between stock price reactions and various layoff characteristics (such as whether the layoff is proactive or reactive or whether the layoff is the first in the industry). Implications of the findings are discussed. © 1997 John Wiley & Sons, Ltd.

Russian Mass Privatization: Analysis of Financial Structure and Initial Cash Endowments

This paper analyzes the cash flow and corporate finance structure of large‐size Russian enterprises required by law to privatize. The legal framework and governmental regulatory structure of Russia's mass privatization program are presented, and particular emphasis is placed on tracing the flow of cash (versus Russian privatization vouchers) between enterprises, investors and the government. Most Russian firms raise no cash during the initial privatization process and, accordingly, have substantial difficulties in obtaining funds to continue operations and to finance their growth and expansion. The authors believe that undue emphasis on the use of privatization vouchers has placed many newly privatized firms in conditions of extreme financial distress. Examples of the initial financial structure of three Western corporate finance transactions — spin‐offs, leveraged buy‐outs (LBOs) and Chapter 11 reorganizations — are compared to the initial endowment of liquid resources in Russian firms undergoing privatization.

Growth Opportunities and Risk‐Taking by Financial Intermediaries

ABSTRACTWe show that growth opportunities which cannot be converted to cash under conditions of financial distress are a critical determinant of an intermediary's choice of risk. Financial institutions in which is a low proportion of total assets will be much more likely to engage in go‐for‐broke behavior. The model leads to a reevaluation of the effectiveness of several traditional remedies for dealing with banks that take excessive risks such as raising insurance premiums, intervening before capital is depleted, and restricting investment options. The model also has implications about a new approach to the examination of financial intermediaries.