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

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.