Firms In Financial Distress Research Articles

Unpacking Capital Structure Decisions: Analyzing Short-Term Debt to Equity Dynamics in Shariah Compliant Financially Distressed Firms

Unpacking Capital Structure Decisions: Analyzing Short-Term Debt to Equity Dynamics in Shariah Compliant Financially Distressed Firms

The relationship between firm life cycle and firm financial distress: Empirical evidence from listed firms in Vietnam

The relationship between firm life cycle and firm financial distress: Empirical evidence from listed firms in Vietnam

Is the Nexus between Gender Diversity and Firm Financial Distress Moderated by CEO Duality?

This study examines the impact of gender diversity in the positions of board commissioners, executive directors, and audit committee members on the financial performance of firms experiencing financial trouble. It also evaluates whether the presence of a CEO with multiple responsibilities moderates this relationship. The analysis encompassed 224 publicly traded companies from the non-financial sector, spanning the years 2012 to 2021. The study employed the dynamic panel model system GMM to address issues of endogeneity, simultaneity, and heterogeneity in the data. The findings indicate that the presence of women on supervisory boards and in senior positions has a substantial impact. Companies with a higher number of female board members have reduced financial hardship among Malaysian listed enterprises. Female directors exhibit a greater level of caution and risk aversion while participating in management choices, which is a significant conclusion. Research indicates that the majority of financial variables are inherently endogenous, so dynamic models are better suited for analyzing the interaction between these variables. This study also presents the notable correlation between gender diversity on boards of management, CEO duality, and financial difficulty.

Supply chain risks and the cost of debt: Evidence from the COVID-19 pandemic

This study aims to examine the impact of supply chain risks on the cost of debt. Our analysis is based on a comprehensive dataset of corporate bond offerings of listed firms. We utilize input−output tables to construct the proxies for supply chain risks that capture trade credit financing risks. The results demonstrate that supply chain risks substantially raise the corporate cost of debt and that the effects are magnified during COVID-19. The effects are more pronounced for firms in industries that were hit by COVID-19 more severely, those with high supply chain concentration, state-owned enterprises, and firms in financial distress. Our results are robust to alternative measures of the cost of debt, supply chain risk, and alternative samples. Our study suggests that supply chain security and stability are crucial for ensuring the smooth operation of businesses and maintaining a stable economy.

Is faster really better? The impact of digital transformation speed on firm financial distress: Based on the cost-benefit perspective

Based on the cost–benefit perspective, this study theoretically analyzes and empirically examines the influence of digital transformation speed on firm financial distress. We find that digital transformation speed has a U-shaped relationship with firm financial distress. In addition, after considering the moderating effect of CEO IT background, we find that not only does the effect of digital transformation speed on firm financial distress but, more importantly, their relationship also undergoes a shape-flip from the original U-shape to an inverted U-shape. Finally, we find that CEO power weakens the moderating effect of CEO IT background on the relationship between digital transformation speed and firm financial distress. Our research not only helps to advance theoretical and empirical research on digital transformation but also provides important empirical insights for understanding the economic consequences of accelerating digital transformation, which can be beneficial for digital transformation firms’ managers, investors, and other stakeholders.

Cognitive load, social values and financial distress: drivers of restructuring decisions

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.

Annual report readability and earnings management of financial distressed firms: the moderating role of ownership concentration in India

Annual report readability and earnings management of financial distressed firms: the moderating role of ownership concentration in India

Predicting likelihood of fraud among financial distressed firms in Malaysia using textual analysis

This research paper aims to analyze and predict fraud patterns among failed companies in Malaysia. The approach involves utilizing textual analysis on the management discussion and analysis (MD&A) section within the annual reports. The dataset is subjected to text clustering to group companies based on similar financial characteristics. This clustering process entails several steps, including data conversion, collation, and summarization into a structured format, followed by text pre-processing to cleanse the dataset. Notably, RapidMiner Studio software was utilized to extract data for the study. Subsequently, the documents are clustered using both the K-means and latent dirichlet allocation (LDA) methods. Upon examining a sample of 22 failed companies in the year 2020, the study reveals that financially distressed companies exhibit prominent financial negativity and utilize litigious financial terms within their MD&A sections. These linguistic traits are found to be closely associated with seven distinct characteristics of fraudulent firms. This preliminary findings provide compelling evidence that financial pressure may serve as a triggering factor for fraudulent activities within companies.

The Effect of The COVID-19 Pandemic on The Tax Compliance of Digital Economy Business

Purpose: Tax authority have faced one of the challenges collecting tax revenue during the Covid-19 pandemic in decreasing of the economy will potentially leads firms in financial distress. Financial distress motivated firms to engage tax avoidance. Moreover, activities in the digital economy that are growing rapidly could be a challenge to prevent tax avoidance. Thus, this research intends to investigate how the Covid-19 pandemic affects associations between businesses that engage in digital economy activities and tax avoidance on Indonesian public enterprises. Method: The study used sample of 250 firms which are listed on Indonesia Stock Exchange (BEI) in 2018-2021 and conducted using difference-in-difference method. Findings: The study finds empirical evidence that digital economy activities positively associated with effective tax rate. Nevertheless, the Covid-19 pandemic weakened this association. Novelty: Previous studies partially examined the relationship between the COVID-19 pandemic on tax avoidance and the digital economy on tax avoidance. Quantitative researches about digital business are also mainly carried out in developed countries considering that digital economic activities have been massively carried out in developed countries. This study will complement previous studies where the Covid-19 pandemic and economic activity will be interacted with and linked to corporate tax avoidance behaviour, especially in Indonesia. Keywords: Covid-19; Tax Avoidance; Digital Economy

Financial distress analysis for the prediction of corporate bankruptcy – a case study of a public sector company in India

Purpose: the present study examines the liquidity of the firm and its impact on financial distress, which may or may not increase the chances of bankruptcy. The study also analyzes the profitability, cash position, and solvency of the firm. Design/methodology/approach: we use the data of a listed Government manufacturing company and measure the financial distress and probabilities of bankruptcy to test the chances of financial distress during the period between 2015 and 2019. The financial models used for evaluation in the study are the Altman z-score model, Logit Probability model, and Falmur model. Findings: The study found that there was a chance of bankruptcy in the initial years, but later, it survived the bankruptcy. The study also established that the liquidity and solvency of the firm were not up to the standard. Practical implications: the result of the study extends our theoretical understanding and also provides valuable guidelines to reduce the chance of insolvency, bankruptcy, and financial distress of firms and to maintain the proper financial health of the firm. Originality/value: while many empirical studies investigate the relationship between liquidity position and its impact on financially distressed firms in the industry as a whole, but most do not consider the impact of financial distress in an individual firm or company. Most of the published studies use statistical tools for the evaluation of financial distress. This study uses Multiple Discriminant financial model analysis. Multiple Discriminant financial model Analyses are very useful in deciding remedial actions for financial distress problems

Return predictability of short-selling and financial distress firms: Evidence from Korean stock market

This paper investigates the relationship between short-selling activity and one-month ahead stock returns, with a focus on the role of distressed firms in the Korean stock market. In contrast to the U.S. market, we find that short-selling activity is concentrated on firms in the investment-grade group. Consistent with prior research, we find predictability of short-selling trading in stock returns. Moreover, we find that short-selling activity has significant role in predicting stock returns for investment-grade but not for speculative-grade group in the Korean market.

The role of feature importance in predicting corporate financial distress in pre and post COVID periods: Evidence from China

The prediction of firm financial distress during the COVID-19 crisis episode attracted massive academic attention since economic uncertainty was exacerbated. In this paper, we propose a firm financial distress prediction model based on the Extreme Gradient Boosting-Genetic Programming (XGB-GP) framework by investigating subsamples of pre-COVID and post-COVID periods. The key contribution of our paper is that we explore time-varying prediction features for pre-COVID and post-COVID periods. We illuminate that the earning financial indicator is the dominant feature for financial distress prediction during the pre-COVID period, whereas total financial leverage is the most important factor during the post-COVID period. On this basis, our XGB-GP financial distress prediction model exhibits higher prediction accuracy than the traditional models. As a result, managers can modify the financial leverage level to improve the financial situation of the firm by reducing the debt burden and increasing profitability during the post-COVID period.

To switch or not to switch? The effect of audit firms’ economies of scale on audit firm switches after audit price deregulation in China

We exploit the unique setting of China’s 2014 audit price deregulation policy to examine whether audit firms use their economies of scale (EOS) to compete for clients. We find a significant increase in client firms switching from a non-EOS auditor to an EOS auditor after the audit price deregulation policy was implemented. The additional analyses show that EOS audit firms are more likely to offer audit fee discounts than non-EOS audit firms while retaining audit quality. We also find that the auditors’ EOS effect is more pronounced for highly homogeneous industries and firms paying high abnormal audit fees, firms in financial distress, and firms receiving less capital market attention than for less homogeneous industries and firms paying low abnormal audit fees, financially stable firms, and firms receiving more capital market attention. Finally, we find that the presence of state-owned enterprises and political connections both separately and jointly moderate the effect of audit firm–client realignments from a non-EOS auditor to an EOS auditor after the audit price deregulation. Overall, our study provides important insights for policymakers and regulators reviewing and developing new policies on audit services.

Financial Distress, Audit Quality, and Earnings Management–Indonesia's Mining Sector Evidence

This paper describes research that investigated the association between financial distress (Dist) and accrual earnings management (AEM), and the role played by audit quality (AQ) in that association. Financial distress is measured by The Modified Altman Z-Score for emerging markets (EMZ score), earnings management is measured by discretionary accrual, and audit quality is measured by audit-firm size (Big4). Data analysis was performed with Pooled Least Square. Using data from Indonesian Mining Sector for 2016–2020, the research finds empirical evidence that financial distress firms involve in income-increasing accrual earning management, but such involvement is lower when firms are audited by Big 4 audit firms. This research contributes to previous literature about similar issues, specifically about the impact of financial distress on accrual earnings management. It also presents evidence about the role of audit quality in such an effect.

Bankruptcy Prediction Model Development and its Implications on Financial Performance in Slovakia

Abstract Research purpose. Financial distress being a global phenomenon makes it impact firms in all sectors of the economy and predicting corporate bankruptcy has become a crucial issue in economics. At the beginning of the last century, the first studies aimed to predict corporate bankruptcy were published. In Slovakia, however, several prediction models were developed with a significant delay. The main aim of this paper is to develop a model for predicting bankruptcy based on the financial information of 3,783 Slovak enterprises operating in the manufacturing and construction sectors in 2020 and 2021. Design / Methodology / Approach. A prediction model that uses the appropriate financial indicators as predictors may be developed using multiple discriminant analysis. Multiple discriminant analysis is currently used in prediction model development. In this case, financial health is assessed using several variables that are weighted in order to maximise the difference between the average value calculated in the group of prosperous and non-prosperous firms. When developing a bankruptcy prediction model based on multiple discriminant analysis, it is crucial to determine the independent variables used as primary financial health predictors. Findings. Due to the discriminant analysis results, the corporate debt level of the monitored firms may be regarded as appropriate. Despite the fact that the model identified 215 firms in financial distress due to an insufficient debt level, 3,568 out of 3,783 Slovak enterprises operating in the manufacturing and construction sectors did not have any problems with financing their debts. The self-financing ratio was identified in the developed model as the variable with the highest accuracy. Based on the results, the developed model has an overall discriminant ability of 93% since bankruptcy prediction models require strong discriminating abilities to be used in practice. Originality / Value / Practical implications. The principal contribution of the paper is its application of the latest available data, which could help in more accurate financial stability predictions for firms during the current difficult period. Additionally, this is a ground-breaking research study in Slovakia that models the financial health of enterprises in the post-pandemic period.

Distressed Firms and the Large Effects of Monetary Policy Tightenings

The stance of U.S. monetary policy has tightened significantly starting in March 2022. At the same time, the share of firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s.

Accounting comparability and financial distress

PurposeThe purpose of this study is to present the evidence of the association between financial statement comparability and corporate financial distress.Design/methodology/approachThis is an empirical study, and this study uses multiple regression analysis to evaluate hypothesis.FindingsThe authors find a significant decrease in the probability of financial distress as accounting comparability increases. Findings of this study suggest that distressed firms tend to produce financial statements that compare poorly to those of peer firms; the effectiveness of predicting financial distress with accounting ratios may be conditional on comparability with peers; and financial statement comparability may be predictive of financial distress.Research limitations/implicationsFirst, this study only used publicly available financial data, which may not be representative of all countries and could differ because of differences in accounting practices. Second, although this study found a connection between accounting comparability and financial distress, it cannot prove a causal relationship, as other factors that were not controlled for may also have an impact. Third, this study used various measures of financial distress, but other measures could lead to different results. Finally, this study did not include all relevant variables, such as industry-specific factors and macroeconomic conditions, which could influence the relationship between accounting comparability and financial distress.Practical implicationsFor investors and financial analysts, the results imply that accounting comparability can serve as a useful signal for identifying companies that are more likely to remain financially stable in the long run. Thus, they may prefer to invest in or recommend highly comparable firms over their less comparable counterparts. For auditors, this study underscores the importance of promoting and enforcing accounting standards that improve comparability, as this can help mitigate the risk of financial distress among their clients. Regulators may also consider the implications of the study’s findings when designing policies and guidelines related to financial reporting and disclosure.Originality/valueTo the best of the authors’ knowledge, this is the first study investigating the association between financial statement comparability and corporate financial distress of the US firms. This study uses large, comprehensive and multi-year data. Furthermore, this is the only study that presents the evidence of negative association between comparability and firm financial distress.

Managerial ownership and financial distress: evidence from the Chinese stock market

PurposeThis study investigates the convergence-of-interest and entrenchment effects on the relationship between managerial ownership and financial distress using evidence from the Chinese stock market. It also analyzes whether the relationship is mediated by research and development (R&D) investment.Design/methodology/approachUsing a dataset consisting of 19,059 firm-year observations of Chinese listed companies in the Shanghai and Shenzhen Stock Exchanges between 2010 and 2020, this study employs both piecewise and curvilinear models.FindingsThe results indicate that managerial ownership has a negative association with firm financial distress in both the low (below 12%) and high (above 18%) convergence-of-interest regions of managerial ownership, suggesting that managerial ownership in this region may contribute to improve firm financial status. Meanwhile, managerial ownership has a positive association with firm financial distress in the entrenchment region (12–18%), implying that managerial ownership in the entrenchment region may contribute to impair firm financial status. Furthermore, the results show that R&D investment mediates the association between managerial ownership and financial distress.Originality/valueThis study is the first to provide evidence of a nonlinear relationship between managerial ownership and financial distress, and identify the entrenchment region in the Chinese setting.

Are key audit matter disclosures useful in assessing the financial distress level of a client firm?

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 client firm. Using six years of KAM disclosures for U.K. Premium-listed firms beginning in 2013, we investigate the relation between firm financial distress and the number, risk level, financial statement impact, and individual nature of auditor-disclosed KAMs. We expand on literatures examining audit report disclosures in gauging financial distress assessments as well as the utility of expanded audit reporting. We find the greater the number of KAMs disclosed, the higher a firm's financial distress level. Additionally, results show entity-level KAMs, account-level KAMs with a primary impact on profitability and solvency, and certain types of individual KAMs are more likely to be disclosed when client firms face higher levels of financial distress. The results are robust to alternative measures of financial distress and to endogeneity tests. Our findings also indicate KAMs have predictive ability in assessing subsequent periods' financial distress levels. In all, evidence from this study suggests a way financial statement users can use independent auditor disclosures to assess one of the main risks associated with a firm - the risk of failure.

The relationship between firm financial distress, firm life cycle and firm cash holdings of non-financial listed Vietnamese companies

The relationship between firm financial distress, firm life cycle and firm cash holdings of non-financial listed Vietnamese companies