Corporate financial distress: An empirical study on Egyptian listed firms

Abstract

Corporate financial health is pivotal to the well-being of the economy as a whole owing to its importance to multiple stakeholders including creditors, investors, suppliers, and regulators. As such, it is of crucial importance to analyze the factors affecting corporate financial distress so as to allow the different stakeholders to take in time remedial measures. This research aims to examine the role played by financial ratios in explaining and predicting corporate financial distress. In order to achieve this, financial data of listed firms on EGX100 for the years 2016 to 2021 were incorporated in logistic regression analysis to estimate the probability of financial distress. Findings indicate that the most significant financial ratios in predicting corporate financial distress are the working capital to total assets ratio, the earnings before interest and taxes to total assets ratio, and the sales to total assets ratio, and are negatively related to the likelihood of financial distress. Meanwhile, the retained earnings to total assets ratio and the market value of equity to total liabilities ratio are shown to be positively related to the likelihood of financial distress in Egypt.