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A search for macroeconomic determinants of corporate financial distress

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  • Sanjay Sehgal

    (University of Delhi)

  • Ritesh Kumar Mishra

    (University of Delhi)

  • Ajay Jaisawal

    (University of Delhi)

Abstract

The aim of this paper is to explore the macroeconomic determinants of corporate financial distress using a data from the Indian corporate sector. We also consider a set of quasi-macro variables to develop a hybrid model of financial distress. For this purpose, we use accounting information-based three-factor criteria to construct a series for probability of financial distress of firms. We initially use a systematic variable selection approach to develop alternative models of financial distress and then apply the bounds test to establish a long-run equilibrium relationship between financial distress of firms and its determinants. We find that macroeconomic factors play crucial role in determining financial distress. Results suggest that aggregate output, flow of international funds, international demand, and corporate profitability are negatively associated with probability of financial distress. However, periods of high inflation may not be beneficial as the results suggest that a high inflation leads to high financial distress. The findings are important in the sense that movement in these macroeconomic and quasi-macro factors can be useful in monitoring the buildup of risk or financial distress in the balance sheet of firms over time. The set of indicators identified in the study can be used to develop an efficient distress prediction models.

Suggested Citation

  • Sanjay Sehgal & Ritesh Kumar Mishra & Ajay Jaisawal, 2021. "A search for macroeconomic determinants of corporate financial distress," Indian Economic Review, Springer, vol. 56(2), pages 435-461, December.
    • Handle: RePEc:spr:inecre:v:56:y:2021:i:2:d:10.1007_s41775-021-00119-4
    DOI: 10.1007/s41775-021-00119-4
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    More about this item

    Keywords

    Corporate financial distress; Profitability; Macroeconomy; ARDL; FMOLS;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • P11 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Planning, Coordination, and Reform

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