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This study seeks to analyse if the adjustment towards the target short-term debt ratio of small and medium-sized firms (SMEs) is related to financial distress risk.

Data obtained for a sample of Portuguese manufacturing SMEs from 2010 to 2017 were analysed using the system-generalised method of moments (GMM-sys). Using the modified Z-Altman score, the authors classify SMEs according to their exposure to financial distress risk.

Manufacturing SMEs exposed to a high risk of financial distress rebalance their short-term debt ratio quicker. However, regardless of the financial distress risk level, SMEs distant from the target short-term debt ratio adjust more slowly, suggesting that transaction costs are greater than financial distress costs.

Policymakers should promote the access to external sources of finance with low transaction costs for SMEs, exposed to low levels of financial distress risk, to rebalance their short-term debt ratios quicker. Distressed SMEs far from their target short-term debt ratios, but with capacity to rebalance, need government programmes to access finance with low transaction costs to rebalance their short-term debt ratios.

This paper contributes to deepening our understanding of how SMEs, facing financial risk, rebalance their short-term debt ratios. SMEs, facing high financial distress risk, adjust towards their target short-term debt ratios more rapidly. However, SMEs, distant from the target short-term debt ratio face higher transaction costs than financial distress costs. These firms adjust towards their target short-term debt ratios more slowly, which may aggravate the refinancing risk and, ultimately, announce bankruptcy.

The 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.

The 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.

Using 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.

This 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.

Using 2010 corporate governance principles and recommendations (CGPR) as a natural setting, the purpose of this paper is to investigate the relationship between risk management committee (RMC) gender diversity and a firm’s likelihood of financial distress. Empirical evidence regarding whether CGPR (2010) enhances RMC gender diversity (RMCGD) is also provided.

Data were collected from the annual reports of the top 300 Australian Stock Exchange (ASX) listed companies from 2007 to 2014. To control for potential endogeneity, the association between (RMCGD) and a firm’s likelihood of financial distress was investigated using an instrumental variable approach (panel 2SLS regression). The relationship between CGPR (2010) and RMCGD was explored using panel regression analysis with firm fixed effects.

RMCGD was found to be associated with a lower probability of financial distress, suggesting that women are better at monitoring and reducing firms’ excessive risk-taking behaviours, which, in turn, decreases firms’ risk of financial distress. The results also indicate that CGPR (2010) is quite effective in enhancing committee gender diversity. In the additional analysis, the results show that RMCGD moderates the negative relationship between risk and likelihood of financial distress. Importantly, the proportion of women with financial experience on RMCs is more effective in reducing the likelihood of financial distress compared to the proportion of men with financial experience on RMCs. These results highlight the benefits of having a gender diverse RMC.

The results were based on the top 300 ASX-listed companies; thus, restricting generalisability. In addition, this study only focussed on listed firms, non-listed firms may add additional insights to the literature.

The results provide new and useful empirical evidence about RMCGD for Australian policymakers. This paper suggests that, in the short-term at least, RMCGD should be encouraged by regulators. Regulators could also recommend that the firms with a non-diverse RMC include women with financial experience on their RMC.

Given that prior studies have indicated that gender diversity is closely related to risk, this study contributes to the previous literature by investigating RMCGD and its effect on the likelihood of financial distress. It is expected that the role of RMC member would be to protect the firm from ultimate failure (likelihood of financial distress), especially during a financial crisis.

The purpose of this paper is to develop a model to assess and rank the financial risk of a municipal government (“municipality”). Financial risk is the likelihood that a municipality will experience financial distress.

Logistic regression is used with financial indicators to assess the level of financial risk. Then, the municipalities are ranked according to their financial risk. As predictor variables for the regression model, indicators are used that were developed by a Pennsylvania state agency to monitor the financial condition of municipalities.

Financial risk is positively associated with debt service, population, tax effort, and public service on roadways, while negatively correlated with intergovernmental revenues, operating position, user charges, capital outlays, fund balances, and tax revenue concentration. The financial risk model is able to correctly classify up to 99 percent of municipalities as either at risk or not at risk of financial distress.

The financial risk model was developed using data from one state in the USA. Further research is needed to test the model’s application to other states and countries.

Financial risk is on the rise since the Great Recession. This study may be used by municipal managers, citizens, creditors, and regulators to assess and rank the financial risk of a municipality.

This study provides a method of classifying municipalities as either at risk or not at risk of financial distress. Previous models of the financial condition of municipalities do not provide a method of assessing and ranking financial risk.

The purpose of this article is to examine how financial distress risk and currency crisis affect the relationship between financial leverage and financial performance.

This study uses data of 200 firms listed on Istanbul Stock Exchange during the period from 2009 to 2019, resulting in 1950 firm-year observations. Pooled ordinary least squares, random effects, firm fixed effects and two-step system GMM models are used to investigate the hypotheses of this study.

The results reveal that financial leverage has negative and significant effect on financial performance, and that this effect is stronger for firms with higher financial distress risk. Furthermore, the findings provide moderate evidence that currency crisis exacerbates the negative association between leverage and performance.

The results of this study have important implications for firms in emerging markets. Managers can enhance firm performance by reducing the level of financial leverage, especially in firms with higher financial distress risk. These firms incur higher debt costs, and then they can benefit more from the decreases in debt ratio in their capital structure. Moreover, the decreases in debt level have more importance in currency crisis times, when the access to external finance becomes more expensive and more difficult.

To the author's knowledge, this research is the first to examine the effect of currency crisis on the financial leverage–financial performance relationship and is one of few that investigate the role of financial distress risk in determining the linkage between leverage and firm performance.

We examine explicitly priced financial distress risk in post-1990 equity markets. We add a financial distress risk factor to Fama and French's (1993) three-factor model, based on Griffin and Lemmon's (2002) findings that financial distress is not fully captured by the book-to-market factor. We test three-factor and four-factor capital asset pricing models using both annual buy-and-hold analysis and monthly time series analysis across portfolios adjusted for common book-to-market, size, and financial distress factors. We find empirical support for an Ohlson (1980) O-score-based financial distress risk four-factor asset pricing model in the U.S. and Japanese markets.

We assess the impact of NZ IAS 32 on the financial reporting of convertible financial instruments by retrospective application of the standard to a sample of New Zealand companies over the period 1988 ‐ 2003. NZ IAS 32 has a broader definition of liabilities than does the corresponding current standard (FRS‐31) and it does not permit convertibles to be reported under headings that are intermediate to debt and equity. The results of the study indicate that in comparison with the reported financial position and performance, the reporting of convertibles in accordance with NZ IAS 32 would result in higher amounts for liabilities and higher interest. Thus, analysts using financial statement information to assess risk of financial distress will need to revise the critical values of commonly used measures of risk and performance when companies report under NZ IAS

This paper examines contextual factors that affect the association between board gender diversity and firm performance.

The authors use a global sample of listed firms in the tourism industry in 30 countries from 2015 to 2020.

First, firm performance is positively associated with the proportion of female directors on a board. Second, the positive association between firm performance and the proportion of female directors on the board is higher in (1) countries with stronger shareholder rights, (2) countries with stronger securities law regulation stipulating disclosure of board diversity, (3) countries with stronger economic empowerment of women, and (4) during the COVID-19 crisis. Third, corporate financial distress risk is lower in firms with higher proportion of female directors on the board. Fourth, the negative association between corporate financial distress risk and the proportion of female directors on the board is more pronounced in (1) countries with stronger securities law regulations stipulating disclosure of board gender diversity, (2) countries with stronger economic empowerment of women, and (3) during the COVID-19 crisis.

The results indicate that contextual factors (comprising country-level corporate governance structures, economic empowerment of women and economic crisis) can affect the association between board gender diversity and firm performance.

Lai, Li, Conover, and Wu (2010) propose a four-factor financial distress model to explain stock returns in the U.S. and Japanese markets. We examine this model in the stock markets of Australia, and six Asian markets (Hong Kong, Indonesia, Korea, Malaysia, Singapore, and Thailand). We find broad empirical support for the four-factor financial distress risk asset-pricing model in those markets. The four-factor financial distress asset pricing model improves explanatory power beyond the Fama–French (1993) three-factor asset pricing model in six of the seven Asian-Pacific markets (12 of 14 portfolio groupings), while the Carhart (1997) momentum-based asset pricing model only improves explanatory power beyond the Fama–French model in three of the seven markets (4 of 14 portfolio groupings).

This study aims to investigate the relationship between corporate social responsibility (CSR) and financial distress and the moderating effect of firm characteristics, auditor characteristics and the Coronavirus disease 2019 (Covid-19) in China.

The research question is empirically examined on the basis of a data set of 1,257 Chinese-listed firms from 2011 to 2021. The dependent variable is financial distress risk, which is measured mainly by Z-score. CSR score is used as a proxy for CSR. Propensity score matching, two-stage least square and generalized method of moments are adopted to mitigate the potential endogeneity issue.

This study reveals that CSR can reduce financial distress. Specifically, results show an inverse relationship between CSR and financial distress, more significantly in non-state-owned enterprises, firms with non-BigN auditor and during Covid-19. The results are consistent and robust to endogeneity tests and sensitivity analyses.

This study enriches the literature on CSR and financial distress, resulting in a more attractive corporate environment, improved financial stability and more crisis-resistant economies in China.