Firms In Financial Distress Research Articles

Financial distress in the hospitality industry during the Covid-19 disaster

We implement the stress test methodology of the banking industry in conjunction with a Logit model of bankruptcy with parameters estimated with data from the Great Recession (2008–2013) to predict which firms would face financial distress among Spanish hospitality firms during 2020 due to the Covid-19 disaster. The predictions from both methods rely on the last accounting data available and on the expected revenue drop for 2020. Both methods coincide to predict that 25% of these firms will face a financial distress situation if revenues drop 60%. This forecast raises up to 32% of firms if revenues drop 80%. Financial distress will affect mainly small firms. Most of the firms in financial distress will face solvency problems, with total assets being insufficient to pay all debts.

Corporate governance and financial distress: Asian emerging market perspective

PurposeThe purpose of this paper is to examine the impact of corporate governance index (PAKCGI) on firm financial distress for a sample of 152 non-financial firms listed at Pakistan Stock Exchange (PSX) over the period from 2003 to 2017.Design/methodology/approachTo examine the impact of PAKCGI on financial distress (Altman Z-Score), random effect model is applied. The PAKCGI is a self-constructed index based on the five important factors of corporate governance practices, i.e. board of directors, audit committees, right of shareholders, disclosures and risk management. The binary coding approach is adopted for the construction of PAKCGI. Altman Z-Score model is used as a proxy for financial distress indicator. The absolute value of Altman Z-score has been taken as financial distress indicator.FindingsThe outcomes of the study indicate a positive impact of PAKCGI on risk of firms’ financial distress. The positive coefficient of PAKCGI implies that the good corporate practices work as catalyst to reduce risk of financial distress in Pakistan. A significant negative impact of block holders on financial distress suggests that the concentrated block ownership take monopolistic decision to protect their interests. It has also been observed that significant positive impact of institutional ownership on financial distress exists in the Pakistani listed firms. Furthermore, this study also reveals that significant negative association between board size, CEO duality and financial distress indicator.Research limitations/implicationsThe findings may encourage the Pakistani listed companies to follow and implement good corporate governance practices, which would lead to increase the confidence of investors, regulators and stakeholders.Originality/valueThe current study extends the corporate governance literature by examining the relationship between the corporate governance attributes and the financial distress status of Pakistani listed companies. From the academic perspective, this paper adds to the knowledge concerning the association between corporate governance practices and risk of financial distress in emerging markets.

Shareholder Value Implications of the Internal Audit Function

SYNOPSIS In 2013, NASDAQ Stock Market LLC (NASDAQ) issued a proposal to mandate the internal audit functions (IAFs) for all listed companies but later withdrew the proposal. In this study, I investigate whether the mandatory IAF adds shareholder value and how the value implications vary across companies. For companies without IAFs before the proposal, I document a positive (negative) price response to the NASDAQ IAF proposal filing (withdrawal). This evidence suggests that, on average, investors perceive mandatory IAF as value enhancing. I find that the positive market reaction is concentrated among firms with lower external audit quality and institutional ownership. Additionally, I document that the return responses are higher for companies with smaller book-to-market ratios, multiple business segments, and lower Altman z-scores. Those results suggest that investors' perceptions of the mandatory IAF are more positive for weakly monitored firms, firms with high-growth prospects and complex business, and firms in financial distress.

“Extraordinary Administration” for Business Rescue in Italy: Admission Requirements and Value Creation

Large Italian firms in financial distress are admitted to the business rescue procedure called “Extraordinary Administration” with a view to preserving the business as a going concern when two objective requirements are met: at least two hundred employees and debts not less than two-thirds both of total assets and revenues. This study examines whether these selection criteria are adequate to identify large firms in terms of value creation. The analysis is motivated by the idea that social utility in the rescue of large firms should not be justified only by the number of employees, but also by the worth of the goods and services created by the firms. The sample is made up of 1,581 Italian manufacturing firms and four subsamples were analyzed for the three year period 2015-2017 using a set of logistic regression models. Research findings show that highly leveraged firms eligible to go into “Extraordinary Administration” do not select large firms as measured by proxy variables that take into account value creation, such as total assets and/or revenues. On the other hand, hypothetical alternative selection criteria based on total assets and revenues identify large firms in terms of value creation but no statistical evidence was found to show how these firms are leveraged.

Does board committee independence affect financial distress likelihood? A comparison of China with the UK

This study explores the relationship between board committees’ independence and the financial distress of firms in China and the UK. Akin to previous literature, we estimate this relationship between 2007 and 2016 using a conditional logit model on a sample of matched pair firms. For China, the results indicate a positive and statistically significant association between the percentage of independent audit committee members and the financial distress of firms. In contrast, the opposite relationship was found for independent compensation and nomination committee members. For the UK, the relationships are the same, but the results are significant only for nomination committee independence. Our overall results suggest that independent audit committee members are not favorable for firm survival. In contrast, the independent compensation and nomination committee members are beneficial for the financial health of firms, as they are responsible for designing fair compensation packages and for selecting the most suitable persons to decide the strategic moves of the firm, respectively. A robustness test demonstrates that the results are robust to the assumed functional form imposed by the conditional logit model and confirms our core findings for both Chinese and UK firms.

Turnaround Model Prediction with Content Dimension on Financial Distress Firms

This article aims to synthesize and test empirically turnaround model by content dimension that is an integration of the organization change framework into turnaround research to measure some activities done to avoid failure in turnaround. This study on the Indonesian Stock Exchange (BEI) by using Ordinary Least Square technique. The results of the analysis from content dimension show that the CEO expertise variable has a significant relationship to turnaround, since companies in Indonesia are dominated by family companies, so maintaining the incumbent CEO is more appropriate, because it is a family member. In addition, free assets show a significant relationship with turnaround, while leverage and growth of sales do not have a significant relationship with turnaround. Keywords: Financial Distress, Turnaround Model, CEO Expertise, Free Assets, Leverage and Growth of Sales,

Real options and strategic bankruptcy

Understanding whether and when Chapter 11 bankruptcy provides a real option for resolving operational uncertainty is essential for financially-distressed firms seeking to restructure and continue operating as a going concern. The corporate restructuring literature has centered on the operational and strategic actions firms undertake to improve their competitive position and performance prospects. While it is well understood that Chapter 11 bankruptcy is an efficient mechanism for restructuring assets and debt, it also offers an additional benefit seldom discussed in the literature: a real flexibility option that can help firms to resolve operational uncertainty. This paper develops theoretical predictions about when a “strategic” bankruptcy will facilitate a firm’s emergence from bankruptcy and ability to continue operating as an independent entity. We test hypotheses on a sample of 916 bankrupt firms during the period 1980–2014. The results are consistent with our predictions.

Creditor Rights, Technology Adoption, and Productivity: Plant-Level Evidence

AbstractI use U.S. Census microdata to analyze the effect of stronger creditor rights on productivity. Following the adoption of antirecharacterization laws that give lenders greater access to the collateral of firms in financial distress, treated plants’ total factor productivity increases by 2.6%. This effect is concentrated among plants belonging to financially constrained firms. I explore the underlying mechanism and find that treated plants change the composition of their investments and their workforce toward newer capital and skilled labor. My results suggest that stronger creditor rights relax borrowing constraints and help firms adopt more efficient production technologies.

Firms in financial distress: evidence from inter-firm payment networks with volatility driven by ‘animal spirits’

This paper elaborates an agent-based model of a pure market economy to provide theoretical evidence on how volatility-induced changes in inter-firm payment networks affect the financial distress of firms. This volatility is driven by ‘animal spirits’ in that it arises from the feelings of optimism/pessimism independently of rational decision-making, and influences the liquidity available to each firm through the inter-firm payment network; consequently, some firms may enter financial distress. The model first determines the inter-firm payment network. Then, a mean-reverting square-root process introduces volatility into the inter-firm payment network through firms’ propensity to pay suppliers according to the payments that firms expect to receive from customers. The model is calibrated for compatibility with relevant macro- and microeconomic stylized facts. According to computational experiments, financial distress in the business sector is minimized when feelings of optimism/pessimism generate the lowest volatility in firms’ propensity to pay suppliers. In addition, this volatility must materialize around an intermediate value of firms’ propensity to pay suppliers, and firms must keep this intermediate value over time.

Is Financial Distress Value Relevant? – Implications for Multiple-Based Valuation

AbstractIn 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.

Debt-Equity Swap, Subsidy and Optimal Government Policy

In 2016, the Chinese government proposed a one-time debt-equity swap (DES) program to assist firms in financial distress and to reduce the leverage ratio of non-financial firms. We use a dynamic capital structure model to study the effects of this program on firms with and without subsidy. A DES can increase a firm’s value by lowering its leverage ratio and reducing its expected bankruptcy cost. The subsidized firms initially take more debt and are thus more incentivized to undertake a DES. Notably, a firm’s undertaking a DES can have opposite effects on government value: on the one hand, it can increase government value from the tax-benefit channel, but on the other hand, it can reduce government value by extending the period of tax shields and subsidies granted to a firm. Consequently, we show that the optimal government policy depends on the characteristics of firms and the ultimate goals of government. In particular, the optimal policy for subsidized weak firms is a DES with subsidy removal, which introduces a tradeoff between a DES and a subsidy.

Are Key Audit Matter Disclosures Useful in Assessing Financial Distress?

This study examines the usefulness of new expanded audit report key audit matters (KAM) disclosures in assessing the level of financial distress present at a firm. Using KAM disclosures from a hand-collected sample of UK Premium-listed firms for 2013 to 2018, we explore the association between firm financial distress and the number, risk level, financial statement impact, and nature of disclosed KAMs. Our study expands on recent literature examining the use of audit report disclosures on financial distress prediction models as well as literature examining the utility of expanded auditor reporting. We find the greater the number of KAMs disclosed, the higher the financial distress level of a firm. Results also show the usefulness of KAMs in assessing financial distress levels increases when considering the level and nature of KAM(s) disclosed. Specifically, certain types of entity-level and individual account-level KAMs, as well as KAMs with a primary impact on a firm’s profitability and solvency, are more likely to be disclosed when firms face higher levels of financial distress. Our findings also suggest KAMs have predictive ability in assessing subsequent period financial distress levels. In all, evidence from this study suggests expanded auditor reports can help financial statement users assess and predict one of the main risks associated with a firm - the risk of failure.

The Impact of Financial Distress on Trade Credit in Indonesian Stock Exchange

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.

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

AbstractThis article studies whether debt renegotiation mitigates debt overhang and increases corporate investment. Using mergers between lenders participating in the same syndicated loans as natural experiments that reduce the number of lenders and thus make renegotiation easier, I find that the firms affected by the mergers become more likely to renegotiate the loans and increase capital investment. The effect is stronger for firms with higher Q and firms in financial distress, supporting the hypothesis that the lender mergers mitigate the debt-overhang problem.

Determinants of Stock Return: A Comparison of Financial Distress and Non Financial Distress Firms in Manufacturing Company Listed of Indonesia Stock Exchange

AbstractPurpose –The purpose of this study is to examine the difference of stock return between financial distress and non-financial distress firms and to examine the influence of financial health, financial leverage, liquidity, profitability, book to market equity and size to stock return on the manufacturing firms listed at Indonesia Stock Exchange in the period 2012-2016.Design/Methodology/Approach- The dependent variable in this study is the stock return (SR), while the independent variable are financial health, financial leverage, liquidity and profitability while the variable control are book to market equity and size. The method used is a non-parametric difference test using mann-whitney U and multi-regression panel data with dummy variable using fixed effect model.Findings - The findings obtained this study indicate that there is difference of stock return between financial distress and non-financial distress company, financial distress and financial leverage has a negative influence to stock return and there is positive influence profitability and size to stock return, while liquidity and book to market equity has no impact on stock return. The firms need to increase the level of financial health and increase corporate profits by reduce the level of corporate debt so it will increase the stock return.

Perbedaan Corporate Governance Dan Financial Ratios Pada Perusahaan Distressed Dan Non-Distressed

The purpose of this research is to know the difference between financial distressed firms and non-financial distressed firmsthat listed in Bursa Efek Indonesia for period 2015-2017. This research used 42 manufacturing companies, which 14 companies are financial distressed firms and 28 companies are non-financial distressed firms, with purposive sampling method with total 84 data and using non-parametic statistic Mann Whitney. The results indicates that there is a difference in liquidity and leverage between financial distressed firms and non-financial distressed firms. But, there is no difference in institutional ownership and the size of board director between financial distressed firms and non-financial distressed firms.

Detecting Creative Accounting in Businesses in Financial Distress

This paper investigates whether the management of firms in financial distress applies creative accounting techniques in order to fine-tune the elements of their financial statements. For this purpose, the financial statements of 385 Greek bankrupt firms of the trade and manufacturing sectors for the period 2003 to 2014 were analyzed. The sample was divided into two sub periods; in the period before the financial crisis, that is from 2003 to 2008, and the period 2009 to 2014 during which the Greek economy was in crisis and recession. By applying factor analysis, five financial ratios were selected, which formed the independent variables in a Discriminant Analysis (MDA) and Logit models in order to find those firms which, while they were bankrupt they were classified in the last period of their operation as healthy (type I error).By selecting these firms (common to both models), their accounting data for the last two years before they went bankrupt have been investigated in order to determine whether they have been affected by the application of creative accounting methods. The results showed that the management of some of the selected firms applied creative accounting techniques during the last year of operation before their bankruptcy, which led to the manipulation and falsification of the published financial statements during the period before the financial crisis. However, this is not the case for the period 2009 to 2014, because the economic crisis affects the behavior of managers in applying creative accounting, which is owing to the changes in market rules.

Dlaczego przedsiębiorstwa emitują obligacje zamienne? Analiza polskiego rynku długu zamiennego w latach 2009-2017

<p>Celem artykułu jest identyfikacja przyczyn emisji obligacji zamiennych na polskim rynku kapitałowym. Analiza 71 emisji obligacji przeprowadzonych w latach 2009–2017 przez 38 spółek notowanych na Giełdzie Papierów Wartościowych w Warszawie wykazała, po pierwsze, że ponad połowa obligacji zamiennych została wyemitowana przez niedowartościowanie przedsiębiorstwa znajdujące się w dobrej sytuacji finansowej w celu pozyskania funduszy na realizację nowych inwestycji jako bardziej korzystna alternatywa dla zwykłej emisji akcji. Po drugie, co trzecia emisja obligacji zamiennych została przeprowadzona przez mocno zadłużone i nierentowne spółki w procesach restrukturyzacyjnych, które traktują dług hybrydowy przeważnie jako szybszy i tańszy sposób na podwyższenie kapitału własnego w stosunku do emisji akcji. Po trzecie, co piąta emisja obligacji zamiennych była przeprowadzona dla osiągnięcia korzyści podatkowych dostępnych w polskim systemie prawnym.</p>

MEKANISME CORPORATE GOVERNANCE DALAM PERUSAHAAN YANG MENGALAMI PERMASALAHAN KEUANGAN

The objective of this research is analyzing the influence of Corporate Governance mechanism to the probability of financial distressed firms and the difference influence of Corporate Governance' structure between financially and non financially distressed firms in manufacturing companies listed at Indonesia Stock Exchange in 2004 - 2006. This research data obtained 148 companies, in which is consisted of 55 financially distressed firms and 93 non financially distressed firms using judgment purposive sampling method. Bya= 5%, this research using Logistic Test and Mann-Whitney Test and One sample T -test to analyze the hypothesis. The result shows that the board of commisioner, board of directors, audit committee, independent commissaries, turnover of directors, institutional ownership, and total asset doesn't have influence to probability of financially distressed firms. Meanwhile to see the difference Corporate Governance structure between financially distressed firm and non financially distressed firm shows that only the size of board directors has significant difference between two groups.

FAKTOR INTERNAL PERUSAHAAN YANG MEMPENGARUHI KEBIJAKAN LINDUNG NILAI

Hedging is used to protect the value of a company’s assets or liabilities from exposure to fluctuations in the value of foreign currency. This study aims to investigate the conditions and influence of firm size, growth opportunities, leverage ratio, and financial distress either simultaneously or partially to the hedge policy of BUMN listed in the IDX period of 2013-2016. The sample in this study was chosen based on purposive sampling method, obtained from 16 BUMN companies with research period from 2013-2016. Data analysis technique in this research is descriptive statistical analysis and logistic regression analysis. The results of this study indicate that firm size, growth opportunities, leverage, and financial distress simultaneously have a significant effect on hedging policy. Partially, firm size and financial distress have a significant positive effect on hedging policy, leverage has a significant negative effect on hedging policy, while growth opportunity has a positive effect not significant to hedging policy.