Probability Of Financial Distress Research Articles

Corporate Governance Mechanism and Financial Ratios on the Indonesia Stock Exchange: How do they Affect Financial Distress?

Aims: The purpose of this study was to determine the effect of institutional ownership, board of directors, audit committee, company size, and sales growth on financial distress.
 Study Design: The population of this study consisted of 41 retail subsector companies listed on the Indonesia Stock Exchange (IDX) for the 2019-2022 period. The total observation data is 164 and obtained 64 data samples that meet the criteria and 100 data samples that do not meet the criteria (Loss, Gray Area, Incomplete variables). This research data comes from the company's annual financial statements.
 Methodology: The data collection method is purposive sampling and the analysis technique is model fit test, coefficient of determination test, and logistic regression. Financial distress is calculated using the Altman Z-Score calculation, and hypothesis testing is tested using the SPSS 26 analysis tool.
 Results: The results showed that good corporate governance proxied by the board of directors and audit committee has no effect on financial distress, while institutional ownership affects financial distress. Company size variables affect financial distress. While sales growth has no effect on financial distress.
 Conclusion: Based on this study, it is known that institutional ownership has an effect on financial distress, meaning that the greater the percentage of institutional ownership will reduce the possibility of the company experiencing financial distress. The board of directors has no effect on financial distress, meaning that the number of directors in a company does not affect the occurrence of financial distress. The audit committee has no effect on financial distress, meaning that the number of audit committee members is not able to reduce the problem of financial distress. Company size has an effect on financial distress, meaning that a higher total asset value owned by company would reduce the probability of financial distress. Sales growth has no effect on financial distress, meaning that the high or low level of sales growth does not reflect that it can be followed by an increase in profits earned by the company. To avoid financial distress, it is done by higher percentage of institutional ownership, as well higher total asset value owned by the company properly.

May intellectual capital and corporate governance reduce the probability of financial distress?

May intellectual capital and corporate governance reduce the probability of financial distress?

Stretch or Suppress: Role of Owners and Nominee Directors in Financial Distress

This study investigates the effect of various firm-level corporate governance mechanisms on the likelihood of financial distress in India. We analyze the competing hypotheses of interest alignment and agency theory, examining how controlling shareholders affect the probability of financial distress. Additionally, we assess the potential impact of institutional investor shareholding and bank-appointed directors on the likelihood of financial distress. Our findings suggest that increasing controlling shareholder ownership decreases the probability of distress. However, the effects of institutional investors and bank-appointed directors vary and also depend on the quantum of shareholding of institutional investors and affiliation with business groups. Our results offer insights into improving governance in economies with higher ownership concentration, weaker institutional frameworks, and greater bank participation in credit facilitation. JEL Codes: G32, G33, G34

Does Credit Rating Provide Incremental Predictive Power on a Firm’s Future Financial Distress? Evidence from China

ABSTRACT We examine the incremental predictive power of credit rating on a firm’s future financial distress using a sample of Chinese credit ratings from 2008 to 2019. Our findings suggest that such credit ratings, especially those using investor-pay mode, improve the incremental predictive power of firms’ future financial distress. Specifically, a one notch rating level increase of issuer-pay (investor-pay) credit rating translates into 1.69% (10.24%) lower probability of financial distress. The findings are robust to using a propensity score matching sample and an alternative metric for financial distress. Additional analysis suggests that the incremental predictive power of credit rating on financial distress is more salient for subsamples of credit ratings 1) issued by credit rating agencies (CRAs) with large market shares, 2) when a CRA has a low likelihood of collusion with a firm, or 3) when a firm receives both investor-pay and issuer-pay credit rating.

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.

Does board diversity reduce the likelihood of financial distress in the presence of a powerful Chinese CEO?

PurposeThis paper empirically investigates the impact of board diversity in terms of demographic and cognitive dimensions on financial distress likelihood in an emerging Chinese market to explore whether the Chief Executive Officers' (CEOs) power moderates the relationship between board diversity and the probability of financial distress.Design/methodology/approachTo test the hypothesized relationships, demographic diversity through gender, age and nationality, and cognitive diversity through education, expertise and tenure, are taken as independent variables to investigate their impact on the probability of financial distress measured by the Altman China Z score. Data is collected for 13,740 firm-year observations from 2009 to 2018. This study employs panel data regression under fixed effect assumptions. Further, to control the possible endogeneity issue, this study uses a two-step System Generalized Methods of Moments (GMM) model as a robust check.FindingsThe results reveal that board diversity is positively associated with financial distress Z score, suggesting that diverse boards are helpful in reducing the likelihood of financial distress. Moreover, CEO power positively moderates this relationship. It means that board diversity, in the presence of powerful CEOs, is more effective in reducing financial distress likelihood by controlling the wrong financial decisions taken by top executives to reap personal benefits. Further, the robustness model confirms the relationship between board diversity and the probability of financial distress.Originality/valueTo the best of researchers' knowledge, this is one of the earliest studies to investigate board diversity by constructing demographic and cognitive board diversity indexes as a determinant of financial distress likelihood in China. Further, researchers found no study in the literature using CEO power as a contextual variable on the relationship between board diversity and financial distress.

Pengaruh Operating Cash Flow dan Faktor Pendukung Lainnya terhadap Financial Distress

The purpose of this research is to obtain empirical evidence about the effect of operating cash flow, liquidity, profitability, financial leverage, firm size, managerial ownership, institutional ownership, proportion of independent commissioners, and free cash flow on financial distress. This research used a sample of manufacturing companies that are consistently listed on Indonesia Stock Exchange ranged from year 2019 to 2021 as the population. The sample was obtained by using purposive sampling method and obtained final sample of 65 manufacturing companies listed on Indonesia Stock Exchange so as to obtain a total of 195 research data and used the multiple regression statistic. The result in this research showed that profitability and firm size had an effect on financial distress. A low profitability is a signal of company incapacity to convert revenue flow into profit, and so an increase on profitability will lower the probability of financial distress. Firm size had an effect on financial distress means the greater the company's total assets, the bigger probability the company to experience financial distress because of the greater expenses. Besides, operating cash flow, liquidity, financial leverage, managerial ownership, institutional ownership, proportion of independent commissioners, and free cash flow had no effect on financial distress.

Financial distress in the Austrian tourism industry: hotels and restaurants analysis

Considering the limited number of studies on the early detection of crises and insolvencies in the tourism industry, there are several research gaps. Therefore, this study analyzes which financial and non-financial variables significantly influence the financial distress of the tourism businesses (hotels and restaurants) in Austria. The resource-based and network-based views were used as theoretical foundations to determine which variables influence the probability of financial distress, with a total of 776 observations from 2005 to 2015 inclusive. The results show that variables describing the endogenous unsystematic risk of tourism businesses (firm-specific level and destination level) make the greatest contribution to explaining financial distress, while exogenous unsystematic and exogenous systematic risk variables show little or no relevance.

The determinants of financial distress cost: A case of emerging market

The determinants of financial distress cost: A case of emerging marketAll authorsMuhammad Farooq, Ahmed Imran Hunjra , Saif Ullah & Mamdouh Abdulaziz Saleh Al-Faryan https://doi.org/10.1080/23322039.2023.2186038Published online:08 March 2023Display full sizeThis study analyses the cost of financial distress of non-financial firms listed on the Pakistan stock exchange. Furthermore, it considers the moderating role of concentrated ownership in the relationship between debt and expected financial distress costs. We used the panel data of 214 firms from 2010 to 2018 to analyse the results. We apply fixed effect model to test the hypotheses. We find that ex-ante financial distress costs are based not only on the probability of financial distress but also affect the amount of time and money spent during the distress period. The use of tangible fixed assets and long-term leverage lowers the cost of financial distress, whereas the use of short-term debt has no significant impact on the cost of financial distress. Furthermore, the company’s ownership structure dampens the impact of these factors. Corporate management may reduce the cost of financial distress through better management of fixed assets and financial leverage.

Does investment committee mitigate the risk of financial distress in GCC? The role of investment inefficiency

PurposeThe purpose of this study is to empirically examine how the voluntary formation of a specialised investment committee (IC) and IC characteristics affect financial distress risk (FDR) and whether such impact is influenced by the level of investment inefficiency.Design/methodology/approachThe authors use a large sample of Gulf Cooperation Council (GCC) non-financial companies during 2006–2016. A principal component analysis is done to aggregate and derive a factor score for IC characteristics (i.e. independence, size and meeting) as a proxy for the effectiveness of IC. This study also uses three measurements of FDR to corroborate the findings and partitions sample firms into overinvesting and underinvesting companies to examine the potential impact of investment inefficiency on the IC–FDR nexus.FindingsUsing feasible generalised least square estimation method, the authors document that the likelihood of financial distress occurrence decreases for firms with separate ICs. The authors also find that firms with effective ICs enjoy lower FDR. In other words, the probability of financial distress minimises if the IC is large, meets frequently and has a high number of independent directors. However, the authors find neither any moderation nor any mediation effect of investment inefficiency for the impact of IC and IC attributes on FDR. The additional analysis indicates the expected benefits of an actively performing IC are amplified for firms with risk of both over- and underinvestment. These findings are robust to alternative measures of FDR and investment inefficiency, sub-sample analysis and endogeneity concerns.Originality/valueThis study, to the best of researchers’ knowledge, is the first to provide evidence in GCC firms’ perspective, suggesting that the existence of an effective IC is associated with a lower risk of financial distress, and to some extent, the economic benefits of IC are aggrandised for companies with a high probability of over- and underinvestment problems. These results are unique and contribute to a small but growing body of literature documenting the need for effective ICs and their economic consequences on investment efficiency in the FDR environment. The findings of this study carry valuable practical implications for regulatory bodies, policymakers, investors and other interested parties in the GCC region.

May board committees reduce the probability of financial distress? A survival analysis on Italian listed companies

The aim of this research was to study the effect of the composition and functioning of board committees on firms' financial distress. Exponential, Weibull and Cox regression models were used to conduct a survival analysis on a sample of 273 Italian listed companies for the period 2004–2017, which indicated that the presence of non-executive members on remuneration and audit committees, and remuneration committees meeting more frequently may enhance firms' stability. In contrast, a high frequency of nomination committee meetings seems to be positively related to the probability of financial distress.Although we only partially controlled for endogeneity issues, our findings contribute to the literature on financial distress-prediction models by deepening the importance of the composition and functioning of board committees (beyond other corporate governance variables and financial ratios). We can also provide firms with practical suggestions to promote financial stability.

Financial distress forecasting with a machine learning approach

A highlighted issue relating to the financial distress of public companies raises more debate from both academic and current practice perspectives as financial markets are currently a key source of growth for the local and international economies. In the context of advanced technology and the digital revolution, forecasting and early detection of financial distress are important methods that contribute to increasing confidence between investors and the market and help to make sound decisions promptly to avoid reaching bankruptcy (Fuentes et al., 2023). This study employs machine learning algorithms to measure the probability of financial distress of listed firms on the Vietnam Stock Exchange by using a dataset with 4,936 observations from 2009 to 2020. The research has identified internal determinants such as debt-to-equity ratio, asset turnover ratio, and profit margin ratio as indicators that have the greatest impact on financial distress under different models. The results reveal that Model 1 — Altman and Model 3 — Zmijewski predict financial distress with an accuracy rate of 98%. In addition, we have determined the threshold when using the decision tree algorithm, which has an important impact on the financial distress of listed firms. This finding contributes to the existing literature review and is consistent with previous studies of Chen et al. (2021) and Martono and Ohwada (2023).

Estimating the Risk of Financial Distress Using a Multi-Layered Governance Criterion: Insights from Middle Eastern and North African Banks

In this study, we explored the association of bank-level governance and state-level governance with the likelihood of banks’ financial distress in developing economies. Using a panel data sample of 954 bank-year observations of 106 conventional banks across 14 Middle Eastern and North African (MENA) countries from 2010 to 2018, we found that bank governance arrangements seemed to be negatively attributed to the probability of financial distress. We also found that the relationship of political stability with financial distress prospects is—contrary to our expectation—insignificant, whereas government effectiveness negatively influences the likelihood of financial distress. Our empirical evidence offers practical implications for bank managers, regulators, and credit rating agencies, and suggests several future research avenues that can build on our findings.

Assessing Financial Distress and its Association with Leverage, Liquidity and Profitability: Evidence from Textile Industry of Bangladesh

Objective: The study is aimed to determine the occurrence of financial distress and its interconnections with leverage, liquidity and profitability in the listed textile companies of Bangladesh prevailing for the period of 2011 to 2021. Design/methodology: This empirical study is based on the secondary data. The data for this study is retrieved from the annual financial statements of textile companies listed in Dhaka stock exchange (DSE). The analysis examines 33 firms over a period of 11 years stretching from 2011 to 2021. Altman Z score model is used here as a barometer for assessing financial distress in Bangladeshi textile industry. Considering the financial distress as a categorical variable forward (stepwise) logistic regression model is used to address the association of leverage, liquidity and profitability with the financial distress. Results: Results of Z score confirmed that seventeen firms were in safe zone during the whole study period when nine firms showed a distressing tendency during the whole study period. Further the study concluded that liquidity (in model III) and profitability (in model II & III) have significant negative influence on the probability of financial distress. Where, leverage held significant negative influence on the financial distress throughout estimated model I, model II and model III. Significance: This study may be used as an effective tool for the firm’s management, policy makers, stockholders, government and other interested parties of Bangladeshi textile industry. This study can serve as valuable evidence for firm’s managers regarding any financial decisions or to detect early signal of financial distress. The revealed influences of leverage, liquidity and profitability on financial distress will serve as a benchmark for the managers to set up various controlling measures. Keywords: Altman Z score, Bangladesh, Bankruptcy, Financial distress, Leverage, Liquidity, Logistic regression, Profitability, Textile industry

Prediksi Financial Distress Perusahaan Sektor Industri Consumer Cyclical

This study attempts to investigate five company performance variables that affect the probability of financial distress in companies in the cyclical consumer sector. Companies have demand patterns that are strongly influenced by the business cycle, and face stiff competition in their own industries, both domestically and globally. On the other hand, the current massive technological developments have disrupted many companies in the cyclical consumer industry sector. Meanwhile, conditions that make it more difficult for companies around the world in general are the arrival of the COVID-19 pandemic that has hit the world since the end of 2019 until now has not ended. This study uses a binary logistic regression analysis technique with a sample of 10 cyclical consumer industrial sector companies during 2017-2021. The research findings show that there are three variables that have a significant negative effect on financial distress, namely: (1) cash flow from operating activity, (2) cash flow from financing activity, and (3) price – earnings ratio. Thus, if these companies can improve the performance of these three variables, they will be able to reduce financial distress. However, efforts to improve these three factors have encountered obstacles due to the arrival of the COVID-19 pandemic since the end of 2019 until now, which has not been completed, and even tends to exacerbate the company's financial difficulties.

Accounting Discretion, Loan Loss Provision in Financial Distress: Evidence from Commercial Banks

Abstract This study explores the association between earning management practices and financial distress in commercial banks. Earning management is measured through discretionary loan loss provisions and non-discretionary loan loss provisions. Modified Altman’s Z-score has been used as a proxy for financial distress. Panel regression with fixed and random effect has been employed for empirical analysis. The study finds a significant positive association between DLLP, NDLLP and financial distress in terms of the Altman Z-score. In the case of NDLLP, liquidity reduces the probability of financial distress. Whereas, a bank’s SIZE, LEVG and AQ enhance the likelihood of financial distress. The robustness tests were applied to find the association between NDLLP and FD using logistic regression to validate baseline estimates results of the random effect model. The findings of this study have implications for the policymakers, regulators and internal stakeholders to devise effective regulatory measures for well-informed investment decisions.

The Role of Female Directors on Probability of Financial Distress

This study aims to determine the effect of female directors on the probability of financial distress in companies listed on the Indonesia Stock Exchange from 2016 to 2021, except in the financial industry, where the total number of company data observations is 2,840. The study used binary logistic regression analysis and penalized maximum likelihood. The study’s results found that female directors do not affect the probability of financial distress in the company. A robustness test is also conducted to compare the consistency of the results between SOEs and non-SOEs with the number of observations for each type of company: 114 observations and 2,726 observations. The findings are consistent, showing that female directors do not affect the likelihood of financial distress in SOEs or non-SOEs. Therefore, this study could provide practitioners with updated understandings and perspectives regarding the existence of female directors in companies that show the proportion of female directors is still low, so the effect on the probability of a company’s financial distress has not been seen

Board composition, ownership structure and financial distress: insights from UK FTSE 350

PurposeThis study aims to investigate the possible implications of compliance with corporate governance (CG) provisions, including board composition and ownership structures, on the firm’s likelihood of falling into financial distress.Design/methodology/approachThe study applies a random-effects logistic regression model as a baseline analysis using a sample of 110 FTSE 350 manufacturing companies from 2014 to 2019. This technique is supported by conducting a two-stage Heckman regression model to overcome the potential existence of endogeneity problems.FindingsThe empirical evidence suggests that board composition and ownership structure are heterogeneously associated with financial distress probabilities in that they might have either reduced or increased the financial distress of the sampled firms. Specifically, board independence, board gender diversity, audit committee independence and institutional ownership negatively influence the likelihood of financial distress. In contrast, and consistent with the expectations, ownership concentration is positively attributed to financial distress, while the board size, audit committee size and managerial ownership have insignificant impacts on financial distress.Originality/valueThe study extends the existing body of knowledge by examining the collective effect of board characteristics and ownership structures on firms’ financial distress likelihood among a sample of manufacturing firms within the FTSE 350 index post the 2008 global financial crisis and following the recent CG reforms in the UK during the study period from 2014 to 2019.

Does board diversity reduce the probability of financial distress? Evidence from Chinese firms.

This paper empirically investigates the impact of cognitive board diversity in education, expertise, and tenure facets on financial distress likelihood in the emerging economy of China. This study examines how this relationship varies across State-Owned Enterprises (SOEs) and Non-State-Owned Enterprises (NSOEs). Paper argues that the Chinese stock market, as a typical emerging market, is an excellent laboratory for studying the impact of board diversity on the probability of financial distress. Its underdeveloped financial system and inadequate investor protection leave firms unprotected from financial hardship. A sample of 12,366 observations from 1,374 firms from 2010 to 2018 shows that cognitive diversity qualities are positively linked with Z-score, implying that directors with different educational backgrounds, financial skills, and tenures can assist in reducing the probability of financial distress. Cognitive board diversity reduces the likelihood of financial distress in SOEs and NSOEs. However, tenure diversity is insignificant in all cases. Furthermore, the robustness model “two-step system Generalized Methods of Moments (GMM)” demonstrated a positive association between educational diversity, financial expertise, and financial distress scores. The results have significant implications for researchers, managers, investors, regulators, and policymakers.

What drives corporate cash holdings in MSMEs?: Evidence from India

PurposeThis study investigates the factors affecting corporate cash holdings for a sample of 598 Indian Micro, small and medium-sized enterprises (MSMEs) for nine years (2011–2020).Design/methodology/approachThe system generalized method of moments (GMM) approach is used to examine the determinants of cash holdings in the Indian MSME context.FindingsThe article shows liquidity, cash flow, leverage, firm size, probability of financial distress and cash flow volatility significant in explaining cash holding decisions for MSMEs in India. No evidence of firm age and growth opportunities as determinants of cash holdings in Indian MSMEs has been found. In addition, strong evidence of cash flow volatility, cash flow and liquidity in differentiating the cash holding decisions in the service and manufacturing industry has been documented.Originality/valueWhile earlier research has addressed this problem in developed nations, this is the first study that fulfills the need to investigate the variables that influence MSMEs' cash holding decisions in a developing economy like India.