Selecting Early Warning Indicator To Identify Corporate Sector Distress: Efforts To Strengthen Crisis Prevention

Arlyana Abubakar (), Rieska I. Astuti () and Rini Oktapiani
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Arlyana Abubakar: Bank Indonesia
Rieska I. Astuti: Bank Indonesia

No WP/7/2015, Working Papers from Bank Indonesia

Abstract: This research aims to develop early warning indicator (EWI) which can provide earlier signal on financial distress in corporate sector. Therefore, effort to prevent deeper eterioration can be anticipated early and financial system stability remains resilient. In the first phase, based on corporate financial report, indicator candidates are grouped into four categories: liquidity indicator, solvency indicator, profitability indicator, and activity indicator. Indicator selected as EWI is the one which can predict corporate distress event in 2009 Q1 with the least statistical error. Statictis evaluation result shows that in aggregate indicators debt to equity ratio (DER), current ratio (CR), quick ratio(QR), debt to asset ratio (DAR), solvability ratio (SR), and debt service ratio (DSR) can give signal in a year prior to the distress event in 2009 Q1, so that the indicators can become EWI for corporate financial distress.

Keywords: early warning indicator; financial distress (search for similar items in EconPapers)
JEL-codes: C15 G01 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-12
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