Determinants of Financial Distress among the Companies Practise Note 17 Listed in Bursa Malaysia

Abstract

The failure of companies to remain profit incurred gradually over several years. Market value of a company under financial distress will reduce; as suppliers prefer cash basis payment on the delivery terms and this may cause a cancellation of order from the customer since the anticipated items would not be delivered on time. Several factors can lead to the failure of a company and determinants of financial distress are important to the company, bankers, investors, the asset manager and rating agencies. Early signs of financial distress can help the manager to take preventive actions to save the company from falling prey to distress. Any economic agent that has any interest with the company namely shareholders, managers, employees, bankers and clients will be affected with the company's failure. Therefore, the main objective of this study is to determine financial distress among the companies Practice Note 17 (PN17) listed in Bursa Malaysia by using the Altman Z-Score Model as a proxy to financial distress. Panel data from 18 companies listed in PN17, Bursa Malaysia for a period of eight (8) years, from 2009 to 2016 were analysed using Fixed Effects Model. This research used the Financial Statement from specific variables that are not used in Altman Z-Score model as potential determinants financial distress. The findings indicate that leverage and profitability are significant determinants of financial distress.

The Effect of Leverage, Sales Growth, Cash Flow on Financial Distress with Corporate Governance as a Moderating Variable

“…Thus, the higher the leverage, the greater the risk of the company's inability to pay off debt so that the company will get closer to difficult financial conditions. This research is in line with research conducted by Keener (2013), Jaafar et al(2018) and Simanjuntak et al(2017) where they stated that leverage is able to affect financial distress positively. This means that the higher the leverage ratio of a company, the greater the probability that a company will experience financial distress.…”

“…Research by Nyamboga et al(2014), Widhiari & Merkusiwati (2015), as well as Yudiawati & Indriani (2016) prove that sales growth can negatively affect financial distress. As with research by Jaafar et al (2018) prove sales growth is not able to affect financial distress. Research conducted by Sayari & Mugan (2013) as well as Fawzi et al(2015) show evidence of cash flow is able to influence financial distress negatively and significantly.…”

“…(Ong et al, 2017) (Daniel & Ionut, 2013) Sales growth (PP) This ratio measures the increase in the level of sales in a period. (Widhiari & Merkusiwati, 2015) (Jaafar et al, 2018) Cash Flow (AK) Changes in the amount of cash that occurs in a company during a certain period (Julius, 2017) (Julius, 2017) Corporate Governance (CG) The process or system of management, direction, and control in a company that is influenced by legislative, regulatory, legal, market mechanism, and the efforts of all participants (Haq et al, 2016) (Udin et al, 2017) Source: Various sources the probability of a company suffering financial distress.…”

“…Research results by Simanjuntak et al (2017), Jiming & Weiwei (2011) and Jaafar et al (2018) show evidence that leverage variable has a significant positive effect on financial distress. This means the higher the leverage, the greater the company's probability of being in a financial distress situation.…”

“…However, the previous research still shows inconsistency results. For example: Research conducted by Jaafar et al (2018), Alifiah (2014), andSimanjuntak et al (2017) show evidence that leverage is able to have a significant positive effect on financial distress. But different from the results of the research by Finishtya (2019) as well as Restianti & Agustina (2018) which find result if leverage is not able to influence financial distress.…”