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Article
Publication date: 2 September 2021

Sourour Hazami-Ammar and Amal Gafsi

The purpose of this paper is to examine the effects of corporate governance failure, excess remuneration and entrenchment of managers, company variables and corporate…

Abstract

Purpose

The purpose of this paper is to examine the effects of corporate governance failure, excess remuneration and entrenchment of managers, company variables and corporate governance variables on the company’s financial distress risk (DETR) in the French context.

Design/methodology/approach

Using the regression analysis, this paper is based on 201 observations about 67 companies of SBF 120 from 2015 to 2017. Data are collected on the Thomson Reuters database and in the referenced documents, which are published on the internet.

Findings

The research findings reveal that firm’s DETR is influenced negatively by excess remuneration and entrenchment of managers. In addition, there is a positive and significant relationship between DETR and company variables (performance and ownership structure) and corporate governance variables (power structure). However, a company’s size and board of directors’ independence do not affect firms’ DETR.

Practical implications

The impact highlighted between remuneration and entrenchment of managers and the financial distress of the company is explained by the intention of managers to work for announcing good short-term performance indicators that are most favorable to them.

Originality/value

The shareholder/manager agency problem can be changed when business performance tends to decline. Certainly, the managerial latitude adopted by the managers is used as an external careerism strategy. Its positive impact on the reduction of the firm’s financial distress can benefit shareholders who aim to sell their securities in the short term.

Details

Corporate Governance: The International Journal of Business in Society, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1472-0701

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Article
Publication date: 26 June 2021

Muhammad Farooq, Shahzadah Fahed Qureshi and Zahra Masood Bhutta

This study aims to analyse 508 financially distressed firm-year observations for the period 2010–2018 of Pakistan Stock Exchange (PSX) listed firms to examine the…

Abstract

Purpose

This study aims to analyse 508 financially distressed firm-year observations for the period 2010–2018 of Pakistan Stock Exchange (PSX) listed firms to examine the magnitude of indirect financial distress costs (IFDC) and to investigate which firm-specific variable is relatively important in explaining these indirect costs. This will not only enrich empirical literature but also helpful in cross-country comparison.

Design/methodology/approach

Optimal model selection along with panel data analysis technique is used to select the most optimal model to observe the findings. Financial distress is measure through Altman’s Z-score and firm-specific variables cover leverage, level of intangible assets, investment policy, tangible assets, firm’s size, level of liquid assets and Tobin’s Q of sample firms.

Findings

The findings of this study show that the average size of IFDC for the sample observations is 6.70%. In addition to this, finding further suggest that leverage, the level of intangible assets and changes in investment policy have positive while the size of the firm and Tobin’s Q have a significant negative impact on IFDC. Further, this paper argues that the level of tangible assets and liquid assets are statistically unimportant in observing the IFDC for PSX financially distressed firm-year observations.

Practical implications

The findings of this study provide more insight to corporate managers and investors about the association between firm-specific financial characteristics and IFDC concerning Pakistani firms. Furthermore, this study contributes to the existing literature by adding new evidence from developing countries such as Pakistan which are helpful for regulatory bodies and policymakers in the formulation of long-term strategies to manage the financial distress costs.

Originality/value

The study extends the body of existing literature on IFDC regarding Pakistan. The results suggest that policymakers may pay special attention to the quality of a firm’s capital structure strategies while predicting corporate financial distress costs.

Details

Pacific Accounting Review, vol. 33 no. 4
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 22 July 2021

Muhammad Farooq, Amna Noor and Shahzadah Fahad Qureshi

The present study aims to explore the role of corporate social responsibility (CSR) on the likelihood of financial distress for a sample of 139 Pakistan Stock Exchange…

Abstract

Purpose

The present study aims to explore the role of corporate social responsibility (CSR) on the likelihood of financial distress for a sample of 139 Pakistan Stock Exchange (PSX) listed firms throughout 2008–2019.

Design/methodology/approach

Panel logistic regression (PLR) and the dynamic generalized method of moments (GMM) estimator are used to examine the impact of CSR on financial distress. The investment in CSR measures through a multidimensional financial approach which comprises the sum of the contribution made by the company in the form of charitable donation, employees’ welfare and research and development, whereas the Altman Z-score and ZM-Score are used as an indicator of financial distress. The higher the Z-score lower will be the probability of financial distress, whereas the higher ZM score shows a greater probability of financial distress risk.

Findings

The authors find a significant negative impact of CSR on financial distress in both PLR and GMM models. This finding is consistent with the stakeholder view of CSR, as an investment in CSR not only aligns the interest between shareholders and stakeholders but also mitigates the risk of financial distress as well.

Research limitations/implications

Like other studies, the present study is not free from limitations. First, financial firms skipped from the sample, although literature witnesses a lot of studies highlight the financial firms' commitment to achieving CSR goals. Second, financial distress occurs in different stages, the authors fail to establish linkage CSR engagements at different stages of CSR. In the future, researchers can make a valuable addition by covering these missing links in present studies.

Practical implications

The findings of this study provide more insight to corporate managers and investors about the association between the quality of investment in CSR and the degree of financial distress, concerning Pakistani firms. Furthermore, this study contributes to the existing literature by adding new evidence from developing countries such as Pakistan which are helpful for regulatory bodies and policymakers in the formulation of long-term CSR strategies to manage financial distress.

Originality/value

The study extends the body of existing literature on CSR and the likelihood of financial distress in Pakistan. The results suggest that policymakers may pay special attention to the quality of CSR while predicting corporate financial distress.

Details

Social Responsibility Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1747-1117

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Article
Publication date: 16 June 2021

Muhammad Farooq and Amna Noor

This study aims to explore the role of corporate social responsibility (CSR) on the likelihood of financial distress for a sample of 139 Pakistan Stock Exchange (PSX…

Abstract

Purpose

This study aims to explore the role of corporate social responsibility (CSR) on the likelihood of financial distress for a sample of 139 Pakistan Stock Exchange (PSX) listed firms throughout 2008–2019.

Design/methodology/approach

The dynamic generalized method of moments (GMM) estimator is used to examine the impact of CSR on financial distress. The investment in CSR is measured through a multidimensional financial approach which comprises the sum of the contribution made by the company in the form of charitable donation, employees’ welfare and research and development, while the Altman Z-score is used as an indicator of financial distress. The higher the Z-score, the lower will be the probability of financial distress.

Findings

The authors find a significant positive impact of CSR on financial distress in GMM model. This finding is consistent with the shareholder view and over-investment hypothesis of CSR as management makes an investment in CSR to get personal benefits, which resultantly leads the firm toward financial distress state. Further, this positive relationship remains present for firms having strong involvement in foreign business through exports.

Research limitations/implications

Like other studies, the present study is not free from limitations. First, financial firms are skipped from the sample, although literature witnesses a lot of studies highlight the financial firms’ commitment to achieving CSR goals. Second, financial distress occurs in different stages, and this study fails to establish a linkage between CSR engagement at different stages of financial distress. In the future, researchers can make valuable addition by covering these missing links in present studies.

Practical implications

Findings suggest several practical implications. For policymakers, they should encourage firms to adopt more socially responsible behavior as it not only prevents them from distress but also comes with better investment behavior, minimize bankruptcies and make economies more strong and stable. Second, results suggest corporate managers emphasize socially responsible behavior as its benefits are beyond the “societal benefits” as it lessens financial distress through lower cost of debt, lesser financial constraints and reduced cost of information asymmetry, and it minimizes the cost of capital. Lastly, investors make risk premium assessments related to future earnings by determining the likelihood of financial distress in the future.

Originality/value

The study extends the body of existing literature on CSR and the likelihood of financial distress in Pakistan, which is according to the best knowledge of the authors, not yet studied before. The results suggest that policymakers may pay special attention to the quality of CSR while predicting corporate financial distress.

Details

Pacific Accounting Review, vol. 33 no. 3
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 11 February 2021

Noman Younas, Shahab UdDin, Tahira Awan and Muhammad Yar Khan

The 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…

Abstract

Purpose

The 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/approach

To 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.

Findings

The 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/implications

The 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/value

The 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.

Details

Corporate Governance: The International Journal of Business in Society, vol. 21 no. 4
Type: Research Article
ISSN: 1472-0701

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Book part
Publication date: 8 November 2010

Maria Carapeto, Scott Moeller, Anna Faelten, Valeriya Vitkova and Leonardo Bortolotto

This chapter investigates the effectiveness and the motivation behind the choice of different types of distress resolution strategies in the banking sector. This is a…

Abstract

This chapter investigates the effectiveness and the motivation behind the choice of different types of distress resolution strategies in the banking sector. This is a global study that analyzes key financial characteristics of distressed banks that were either acquired by other banks, divested assets, or were subject to government intervention, as well as the change in the financial profile of those distressed institutions from one year pre-deal to three years post-deal. The results show that governments intervene in the (relatively) best performers that only underperform in liquidity ratios, an indication of critical short-term flow problems. Distressed sellers, the underperformers of the three groups, enjoy much improved performance, in particular in cross-border deals. There is some evidence of foreign acquirers “cherry picking” the least distressed banks, though no significant differences in target performance remain post-deal between cross-border and domestic deals. These findings provide some useful guidance for policy makers globally and for future financial crises that impact the banking sector.

Details

International Banking in the New Era: Post-Crisis Challenges and Opportunities
Type: Book
ISBN: 978-1-84950-913-8

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Book part
Publication date: 10 November 2020

Sarah Sobhy Mohamed

This chapter aims at examining financial distress issue by designing a comprehensive model to explain and predict financial distress in Egypt. This comprehensive model…

Abstract

This chapter aims at examining financial distress issue by designing a comprehensive model to explain and predict financial distress in Egypt. This comprehensive model incorporates accounting ratios, market-based ratios and macroeconomic ratios. The sample of the existing research includes all the listed firms in two main sectors: basic resources and chemicals. Using logistic regression model, the results showed that adding market ratios and macroeconomic ratios enhances the predictability of the model and accounting information are not sufficient to explain financial distress.

Details

Financial Issues in Emerging Economies: Special Issue Including Selected Papers from II International Conference on Economics and Finance, 2019, Bengaluru, India
Type: Book
ISBN: 978-1-83867-960-6

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Article
Publication date: 8 January 2021

Sara Sofia Gomes Mariano, Javad Izadi and Maurice Pratt

The purpose of this study is to investigate the impact of corporate governance structures on the likelihood of financial distress in UK listed companies. The paper…

Abstract

Purpose

The purpose of this study is to investigate the impact of corporate governance structures on the likelihood of financial distress in UK listed companies. The paper examines the impact of borrowing and corporate governance structures on financial distress likelihood in UK companies.

Design/methodology/approach

The study uses a quantitative approach with financial, governance and borrowing measures and data from 270 firm-observations between 2010 and 2018. The study analyses the impact of borrowing and corporate governance structures to indicate financial distress likelihood in British companies. Corporate governance variables such as ownership concentration, independence indicators, chief executive officer duality, director remuneration and corporate loans are considered, as well as the UK Corporate Governance Code.

Findings

The results indicate that companies with low ownership concentration and a low degree of independence are more likely to incur financial distress. Larger boards and better director remuneration can reduce financial distress likelihood and the existence of corporate loans can increase this likelihood. Empirical consideration of corporate borrowing is a new contribution to the literature.

Originality/value

Variables are highlighted and aggregated that have not otherwise been studied together; the UK Corporate Governance Code’s main ideas are empirically supported; the study is useful for defining corporate governance structure strategies.

Details

International Journal of Accounting & Information Management, vol. 29 no. 2
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 18 January 2021

Ryan Aviantara

PT Garuda Indonesia (GIAA) Persero Tbk is the one only pride airline of Indonesian sovereignty. Although the bird achieved abundant international awards and…

Abstract

Purpose

PT Garuda Indonesia (GIAA) Persero Tbk is the one only pride airline of Indonesian sovereignty. Although the bird achieved abundant international awards and certifications, the bird is dying and needs a remedy immediately. The frequent annual turnover of board executives did not make impact to the financial performance; this seems to be tip of the iceberg, peculiar with the number of restatement over the past decade. Therefore, this paper aims to address the issue through the function of five red flags model which known as Altman Z-score, Sprigate S-score, Grover G-score, Beneish M-score and Dechow F-score.

Design/methodology/approach

This is exploratory study of univariate analysis using financial distress and fraudulent financial statement approach, while the type of data is secondary taken from Indonesia Stock Exchange during 12 years observation from 2007 to 2018.

Findings

Altman, Springate and Grover produce strong indication of GIAA’s financial distress; all models score the same distress indication by 14 times. All distress models agreed that only 2011 and 2012 classify to the safe zone when GIAA performed the corporate actions. Beneish scores fraud indication by eight times. Dechow scores slightly higher by nine times. The number of fraud predictions in this research are in line with the number of restatement, which proves the assumption that restatement can be used as a signal of the financial statement fraud. When GIAA categorized in safe zone, both Beneish and Dechow score no to fraud, this indicates the fraud occurence during health period is lower.

Research limitations/implications

The motivation behind the financial statement fraud is not discuss through this research but from the primary theory of the fraud triangle. Financial distress possesses strong relationship with pressure factor; therefore, exit from financial crisis is one of the best solution to mitigate the financial statement fraud.

Practical implications

The average of Beneish score is −2,26, slightly above the manipulator threshold which is −2,22. This must be marked as an ample conjecture of GIAA’s fraud inclination and been a highlight for the auditor both internal and external when performing control testing, attestation and other assurance services.

Social implications

All models in this study can apply to any other corporate issues, especially for evaluating the government company who has loosen the public trust recently in Indonesia such as PT Asuransi Jiwasraya and PT Asabri. Moreover, the pandemic COVID-19 has brought the world to the new unprecedented risk, especially the economic turmoil which lead the possibilities of corporate distress and fraud. By applying these scores, public might have tools as pre-elemenary assessment to serve a decision where to put trust in a company.

Originality/value

This paper reveals a combination from various models of financial distress and financial statement fraud in order to generate the financial solutions named « DDCC » Debt Restructuring, Debt Conversion, Capex Management and Cost Cutting.

Details

Journal of Modelling in Management, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-5664

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Article
Publication date: 25 February 2020

Darush Yazdanfar and Peter Öhman

The purpose of this study is to empirically investigate determinants of financial distress among small and medium-sized enterprises (SMEs) during the global financial

Abstract

Purpose

The purpose of this study is to empirically investigate determinants of financial distress among small and medium-sized enterprises (SMEs) during the global financial crisis and post-crisis periods.

Design/methodology/approach

Several statistical methods, including multiple binary logistic regression, were used to analyse a longitudinal cross-sectional panel data set of 3,865 Swedish SMEs operating in five industries over the 2008–2015 period.

Findings

The results suggest that financial distress is influenced by macroeconomic conditions (i.e. the global financial crisis) and, in particular, by various firm-specific characteristics (i.e. performance, financial leverage and financial distress in previous year). However, firm size and industry affiliation have no significant relationship with financial distress.

Research limitations

Due to data availability, this study is limited to a sample of Swedish SMEs in five industries covering eight years. Further research could examine the generalizability of these findings by investigating other firms operating in other industries and other countries.

Originality/value

This study is the first to examine determinants of financial distress among SMEs operating in Sweden using data from a large-scale longitudinal cross-sectional database.

Details

Journal of Economic Studies, vol. 47 no. 3
Type: Research Article
ISSN: 0144-3585

Keywords

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