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Title: Predicting financial distress in an emerging market: corporate actions, accounting ratios, or both?

Authors: Azhar Mohamad; Mohamed Azad; Imtiaz Mohammad Sifat

Addresses: Department of Finance, Faculty of Economics and Management Sciences, International Islamic University Malaysia, Gombak 53100, Selangor, Malaysia ' Ministry of Finance and Treasury, Government of Maldives, Male, Maldives ' Department of Finance, School of Business, Monash University, Malaysia Campus, Jalan Lagoon Selatan, Bandar Sunway, 47500, Selangor, Malaysia

Abstract: This paper investigates the utility of corporate actions in predicting financial distress in the context of an emerging country: Malaysia. Recognising the dominance of historical accounting ratios in distress prediction models, we set out to test if employing more current information in the form of corporate action fares better. To this end, we employ three logistic regression models on data from 54 firms and find that corporate actions, on a stand-alone basis, outperform pure accounting ratios and a pooled combination of both. The most significant corporate actions are frequency of capital issuance and shuffling of audit committees. These findings are novel for Malaysia and relatively scarce in broader empirical literature. Meanwhile, among the accounting ratios, working capital and sales volumes emerge as significant predictors of distress, both of which have extensive empirical precedents.

Keywords: financial distress; emerging market; bankruptcy; Malaysia; accounting ratio.

DOI: 10.1504/AJFA.2021.117217

American Journal of Finance and Accounting, 2021 Vol.6 No.3/4, pp.314 - 331

Received: 21 Jun 2020
Accepted: 27 Apr 2021

Published online: 23 Aug 2021 *

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