Untying Empirical Knots: Deterioration of Profitability, Economic Failure, and Financial Insolvency in the Philippines Before Covid-19 Outbreak

Abstract

Corporate bankruptcy has enormous economic ramifications, particularly for investors and creditors of publicly listed companies (PLC). Prior to a corporate collapse, a company's financial status is frequently in jeopardy, and its performance either affirms progress or predicts failure. As a result, management is interested in a technique of determining a company's financial distress. Financial accounting analyses were performed to determine the solvency, liquidity, profitability, and gearing capacity of 136 firms, with 680 economic entries, before CoVid-19 Outbreak. To scrutinise financial distress, the Altman Z-scores and financial zone of discriminations were generated through GB bankruptcy, and PLC bankruptcy model. The link between declining profitability, economic failure, and financial insolvency as indicators of financial distress was examined through panel regression with random factors. Prior to the COVID-19 outbreak, there were no signs of declining profitability, economic collapse, or financial insolvency in the Philippines, according to the findings of the study. Individual components of financial distress and the overall z-score have no statistically meaningful association with financial performance and position markers. As a result, the solvency ratio has little predictive value in forecasting financial distress. The fact that a company has a higher solvency ratio does not also imply that it is less likely to go bankrupt. The findings go counter to classic accounting perspectives and pure managerial research that claim the solvency ratio is always a reliable predictor of financial distress. Finally, the paper examined the financial health of firms and untangled the knots of financial distress.

Management of risk of corporate distress and failure before, during and after the COVID-19 pandemic via corporate governance performance

“…Studies in this area have focused on the impact of COVID-19 and firm performance and financial statements [39][40][41]. Generally, prior studies have mainly focused on the COVID-19 pandemic and corporate governance [18,28], COVID-19 risk and corporate distress and failure [3,8,14,15,35], while studies on corporate governance and corporate distress and failure studies are limited in the world literature [4]. To the best of the researchers' knowledge, there is no known research that has covered all the variables mentioned above in a single study.…”

“…Many companies have been struggling to operate due to the pandemic and have faced various difficulties. This confirms that many companies have failed, and more challenges are still emerging due to overdue debt and low production and sales caused by liquidity risks from the pandemic [15]. Historically, many scholars have addressed the relationship between corporate governance and corporate distress, establishing that good governance reduces the risk of corporate distresses and failures [6,19,20].…”

“…Onsay [15] examined the profitability, solvency, gearing, and liquidity capacity of companies during the pandemic. The findings revealed that there was no significant sign of financial distress before COVID-19, but the presence of the pandemic revealed solvency and liquidity problems, which could predict financial distress.…”

“…The study shows that effective corporate governance coupled with strong risk management controls can salvage the situation around the world. Companies experiencing distress are characterized by the following features: loan accumulation, difficulties in paying workers' salaries, worker layoffs, loan repayment defaults, fast reductions in equity value, liquidity problems, and yearly loss-making [15]. This is where good governance becomes crucial, especially during the pandemic when almost all companies were vulnerable to distress related to liquidity risk, profitability risk, solvency risk, and default risk, amongst others [3].…”

“…Many countries and companies have relied on debt to survive, especially during and after the pandemic, which has raised concerns among stakeholders. Companies are vulnerable to highly volatile economic environments characterized by default risks, financial insolvency, liquidity risks, solvency risk, as well as incessant declines in profitability and sales revenues, which are assumed to be the negative effect of the recent pandemic that impacted the world economy [15,18]. The above-mentioned indicators of corporate distress during and after the pandemic are considered serious problems requiring urgent attention and intervention.…”