Predicting financial distress in non-financial sector of Pakistan using PCA and logit

Ehsanul Hassan, Muhammad Awais-E-Yazdan, Ramona Birau, Peter Wanke and Yong Aaron Tan

International Journal of Islamic and Middle Eastern Finance and Management, 2024, vol. 17, issue 3, 485-508

Abstract: Purpose - This study aims to develop a robust predictive model for anticipating financial distress within Pakistani companies, providing a crucial tool for proactive economic turbulence management. Design/methodology/approach - To achieve this objective, the study examines a comprehensive data set comprising nonfinancial firms listed on the Pakistan Stock Exchange from 2005 to 2022. It investigates 23 financial ratios categorized under profitability, liquidity, leverage, asset efficiency, size and growth. Findings - The study reveals that financial ratio indices are more effective in forecasting financial distress compared to individual ratios. These indices achieve impressive accuracy rates, ranging from a robust 93.90% in the first year leading up to bankruptcy to a commendable 73.71% in the fifth year. Furthermore, the research identifies profitability, liquidity, leverage, asset efficiency, size and growth as pivotal indicators for financial distress prediction. Originality/value - This research underscores the utility and practicality of financial ratio indices, offering a comprehensive perspective on risk assessment and management. In conclusion, this pioneering study provides valuable insights into financial distress prediction, highlighting the enhanced information capture made possible by financial ratio indices. It equips stakeholders in the Pakistan Stock Exchange with an effective means to proactively address financial risks.

Keywords: The Pakistan stock exchange; Financial distress; Bankruptcy; Financial ratios indices; Principal component analysis; Logistic regression; C53; G32; G33 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-10-2023-0404

DOI: 10.1108/IMEFM-10-2023-0404

Access Statistics for this article

International Journal of Islamic and Middle Eastern Finance and Management is currently edited by Prof M. Kabir Hassan

More articles in International Journal of Islamic and Middle Eastern Finance and Management from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().