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The investigation on the impact of downside risk on financial distress

Author

Listed:
  • Rusmawati Binti Ismail
  • Rohani Bt. Md-Rus
  • Kamarun Nisham Taufil Mohd

Abstract

This study investigates if semi-variance could be used to predict financial distress experienced by companies on Bursa Malaysia. A panel data set of 12,906 firm-year observations from 2004 to 2017 is used. Logistic regression is employed to test the hypothesis that risk could predict the occurrence of financial distress after controlling for leverage, profitability and liquidity. Meanwhile, financial distress is measured by using two approaches: negative shareholders equity and shareholders' equity of less than 25% of issued and paid-up capital. The result indicates that downside risk is positively significant in explaining financial distress under both approaches. The study has significant insights for investors, creditors and other interested parties where they can use semi-variance or downside risk in forecasting financial distress. By employing effective risk assessment techniques firms can avoid financial distress and can attract potential investors for their firms.

Suggested Citation

  • Rusmawati Binti Ismail & Rohani Bt. Md-Rus & Kamarun Nisham Taufil Mohd, 2022. "The investigation on the impact of downside risk on financial distress," International Journal of Business Continuity and Risk Management, Inderscience Enterprises Ltd, vol. 12(2), pages 154-168.
    • Handle: RePEc:ids:ijbcrm:v:12:y:2022:i:2:p:154-168
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