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Selection Of Early Warning Indicator To Identify Distress In The Corporate Sector: Crisis Prevention Strengthening Efforts

Author

Listed:
  • Arlyana Abubakar

    (Bank Indonesia)

  • Rieska Indah Astuti

    (Bank Indonesia)

  • Rini Oktapiani

    (Bank Indonesia)

Abstract

This study aims to develop an Early Warning Indicator (EWI that can provide early signals in the presence of pressure on the financial condition of the corporate sector. Thus, efforts to prevent deeper deterioration can be anticipated earlier in order to maintain the stability of the financial system. In the first stage, based on the company’s financial reports, the probable indicators are grouped into four categories i.e. liquidity indicator, solvency indicator, profitability indicator, and activity indicator. The indicators, selected as EWI, are the indicators that can predict the occurrence of corporate distress events, in the Q1 of 2009, with the minimum statistical error. The results of the statistical evaluation showed that in terms of aggregate, the indicators of Debt to Equity Ratio (DER), Current Ratio (CR), Quick Ratio (QR), Debt to Asset Ratio (DAR), Solvability Ratio (SR), and Debt Service Ratio (DSR) signal within a year before a distress event occurs in the Q1 of 2009. Thus, these indicators can be considered as EWI in the presence of corporate financial distress.

Suggested Citation

  • Arlyana Abubakar & Rieska Indah Astuti & Rini Oktapiani, 2018. "Selection Of Early Warning Indicator To Identify Distress In The Corporate Sector: Crisis Prevention Strengthening Efforts," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 20(3), pages 1-32, January.
    • Handle: RePEc:idn:journl:v:20:y:2018:i:3:p:1-32
    DOI: https://doi.org/10.21098/bemp.v20i3.857
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    Cited by:

    1. Rani Wijayanti & Sagita Rachmanira, 2020. "Early Warning System for Government Debt Crisis in Developing Countries," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 103-124.
    2. Harun, Cicilia A. & Taruna, Aditya Anta & Ramdani,, 2021. "Capturing the nonlinear impact in distress state: Enhancing scenario design of stress test," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 265-288.

    More about this item

    Keywords

    Early Warning Indicator; Financial Distress;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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