Prediction of distress and identification of potential M&As targets in UK

Abstract

Purpose -This study seeks to identify financial characteristics that can be employed to assess and predict corporate financial distress in publicly traded firms quoted in the London Stock Exchange. Design/Methodology/Approach -The model incorporates three existing literatures as an alternative to bankruptcy. The model has two stages: the first stage discriminates financially healthy or distressed firms utilizing Binary Logit Regression while in the second stage with the use of the univariate analysis, firms are further categorized into four possible outcomes: financially healthy, potentially healthy targets and financially distressed or potentially distressed acquisition targets. Findings -It was found that financial distress could be identified even three years prior the event. Moreover, statistical significant differences were found between the four firm sample groups. Research limitations / implications -The vast changing environment and the financial crisis, highlight the need for future research on the area that will consider the world trade implications along with the individual macroeconomic variables of each country. Originality / Value -It is the first time that a model is developed for the United Kingdom to follow the hazard model"s procedure based on recent financial data. Moreover, due to the scope of the analysis, a new version of the latter procedure is employed. A further innovation that makes the produced model unique is its ability to classify a firm into one of several a priori groupings according to the latter"s individual characteristics. This overcomes the limitation of earlier studies that considered only two possible outcomes for firms.

Predicting Financial Distress in Malaysia and Its Effect on Stock Returns

“…The results showed that both profitability ratios were negatively significant in predicting financial distress. These results were in accordance with studies by Ong et al (2011), Juniarti (2013, Polemis and Gounopoulos (2012) and Thai et al (2014). Furthermore, these results imply that a high ability to generate profit will help a firm to reduce its financial distress risk.…”

Comparison of Bankruptcy Prediction Models: Evidence from India

“…Bankruptcy prediction is among the most well researched topics in the finance and strategic management literature (Polemis & Gounopoulos, 2012). The early researchers (Ramser & Foster, 1931;Fitzpatrick, 1932;Winakor & Smith, 1935;Merwin, 1942) focused on the comparison of the values of financial ratios in bankrupt and non-bankrupt companies and concluded that the ratios of the bankrupt companies were poorer (Ugurlu & Aksoy, 2006).…”

Determinant Factors of M&As in Emerging Economies: The Impact of Financial Performance in Romanian Minority Acquisitions

“…In the case of takeover intentions, we consider the operational profit (earnings before interest and taxation) because it estimates how efficiently a company can earn profit from its assets, regardless of its size and without being affected by management financial decisions. A high value of this indicator can provide a sign of solid operational performance (Polemis and Gounopoulos 2012;Purba and Septian 2019). In the case of obtaining financial gains, the performance expressed through profit and loss is relevant as an overall result of the activity in an accounting period (Glendening et al 2016).…”

“…For the second objective, we explored the relationship between the purchased stake in minority acquisitions and the efficiency of the operational activity, reflected by earnings before interest and taxes (henceforth, EBIT), as stated by Polemis and Gounopoulos (2012) and Purba and Septian (2019). Since the distribution of purchased stake is bimodal, clearly showing different distributions for the high values (between 1 and 50%) and for the low values of stake (up to 1%), we used a quantile regression (QR) approach, specifically the conditional quantile regression estimator developed by Koenker and Hallock (2001).…”