Firm specific determinants of financial distress: Empirical evidence from Nigeria

Abstract

This paper in an attempt in answering the basic research question on what actually determines financial distress of firms in the manufacturing sector in the country employed the fully modified ordinary least square (FMOLS) on annual time series data of eighteen listed manufacturing firms on the Nigeria stock exchange (NSE) which was obtained from their audited financial statement. The endogenous variable used in the study is financial distress which is measured using the Altman Z score while the exogenous variables employed in the study are firm size, liquidity, profitability, and leverage. The study also employed a list of control variables such as revenue growth and share price. Findings from the study showed that leverage, liquidity, profitability, firm size, revenue growth, and share price are the firmspecific determinant of financial distress of firms in the manufacturing sector in the country. The findings of this study pose significant policy directions. First, managers and owners of the corporate organization need to pay critical attention to these variables when making financial decisions. Second, to ensure smooth operation and continued survival of firms, corporate managers need to design policies that will determine the appropriate level of liquidity, leverage, profitability and revenue growth. Also, management needs to set up control measures that will detect early warning signal of financial distress.

Do Accounting, Market, and Macroeconomic Factors Affect Financial Distress? Evidence in Indonesia

“…This is the result of management in managing the company and reducing agency problems. This argument is supported by empirical findings that stock prices have a significant negative effect on financial distress found by Binh et al (2018), Nouri &Soltani (2016), andFredrick (2019). Referring to the discussion above, we propose hypotheses as follows:…”

“…Previous studies in outlining financial distress focus on accounting measurements only (Tinoco et al, 2018;Tinoco & Wilson, 2013). By referring to the research in Indonesia, which the dominance of FDP research is affected by the use of accounting factors only such as Susanti et al (2020), Indrajati et al (2020), Kholisoh & Dwiarti (2020), Monir (2020), Ogachi et al (2020), Koske et al (2019), Fredrick, (2019), and Kazemian et al (2017), in point of fact the object of research does not cover all companies on the IDX. However, the empirical research of financial distress is more accurately predicted when the researcher adds market and macroeconomic measurements (Tinoco et al, 2018) and the figures become to cover the debate of accounting shortcomings (Mohamed, 2020).…”

Factors That Affect Financial Distress in Indonesia

“…A company can be categorized as experiencing financial distress if the company has a performance that shows negative net income. When firm experiences corporate financial distress, the operating conditions of the firm deteriorate thus leading to heavy financial burden on the firm resulting to inability of the firm in paying both secured, preferential and unsecured creditors (Garlappi and Yan, 2011;Benmelech et al, 2012) in Fredrick (2019).…”

The Moderating Role of Firm Size on the Relationship between Financial Distress and Earnings Management

“…Following, Agrawal and Chatterjee (2015), the first multiple regression model is developed in order to examine the H1 hypothesis concerned with the association between FD and EM and the H2 hypothesis concerned with the association between firm size and EM: 𝑬𝑴 𝒊,𝒕 = ∝ 𝟎 + 𝜷 𝟏 𝒁_𝑺𝑪𝑶𝑹𝑬 𝒊,𝒕 + 𝜷 𝟐 𝑺𝑰𝒁𝑬 𝒊,𝒕 + 𝜷 𝟑 𝑭𝑮𝑶 𝒊,𝒕 + 𝜷 𝟒 𝑹𝑶𝑨 𝒊,𝒕 + 𝜷 𝟓 𝑳𝑬𝑽 𝒊,𝒕 Following Ikpesu (2019), the second multiple regression model is developed in order to examine the H 3 hypothesis concerned with the association between firm size and FD:…”