Impact of financial sustainability on financial distress across non-financial firms listed in Pakistan stock exchange

Abstract

Corporations fall into financial distress or even go into bankruptcy due to many reasons. It is always a challenge for researchers and business managers to identify those determinants that affect financial distress of firms, and to develop an effective prediction model. Previous studies have identified several determinants of financial distress. Most of these studies focused on firm-level financial determinants. The recent developments emphasized on the effect of multi-level determinants (i.e. firm-level, sector-level and country-level) on financial distress. However, there is scarce research focusing financial sustainability interaction relationship between the firm-level financial factors and financial distress. The financial sustainability is relatively a new concept that demands further exploration. For this reason, this study investigates the moderating effect of financial sustainability between firm-level variables and financial distress. Moreover, in order to get predictive efficiency, this study also investigates the collective effect of both firm’s financial and non-financial factors at the sector and country-level on financial distress. In order to carry out vigorous and valid research analysis, this study emphasizes on non-financial firms listed in Pakistan Stock Exchange (PSX). This study is quantitative in nature and it deals with secondary data. Moreover, unbalanced panel data is utilized which comprises of data from year 2009 to 2018. Initially, descriptive statistics was used to explain the basic nature of the collected data. Multiple logistic regression and multiple moderated logistic regressions are applied. In order to account for all the relevant levels of analysis, this study also employs Artificial Nested Tested Procedure (ATNP). Findings of this study reveal that financial sustainability not only has moderating effect on the relationship between firm-level financial variables and financial distress but also improves the predictive accuracy. Moreover, firms-level variables are the best explanatory variables for predicting financial distress followed by sector and country-level variables. In addition, the results of this study are valuable for financial institutions to forecast financial distress and estimate minimum capital requirements to reduce the cost of financial risk. Several limitations that may extend prospects for future research need to be acknowledged. First limitation lies in the fact that due to the incomparable nature of the financial firms with non-financial firms, the study excludes the financial firms from the analysis. Second, limitation is about limited data availability of corporate governance related variables. As financial sustainability is primarily challenge for SME especially in developing countries therefore, investigation of the moderating effect of financial sustainability on the financial behavior of SME sector is a promising agenda for future research. Moreover, in future, macro-level governance variables may also be incorporated in financial distress related studies.