Predicting financial distress: Importance of accounting and firm-specific market variables for Pakistan’s listed firms

Figures & data

Table 1. Variables used in the model

Variables	Measurement	References
NITA	Net income to total assets	Yap et al. (2010)
RETA	Retained earnings to total assets	Hu and Sathye (2015)
ETA	EBIT to total assets	Altman (2017)
QACA	Quick assets to current assets	Zavgren (1985)
CATL	Current assets to total liabilities	Agarwal and Taffler (2008)
CACL	Current assets to current liabilities	Yap et al. (2010)
WCTA	Working capital to total assets	Bhunia et al. (2011)
TLTA	Total liabilities to total assets	Bauer and Agarwal (2014)
INTC	EBIT to interest expenses	Choe and Her (2002)
TETL	Total equity to total liabilities	Altman (2014)
WCLD	Working capital to long-term debt	Ugurlu and Aksoy (2006)
CFOTL	Cash flow from operations to total liabilities	Hu and Sathye (2015)
CFOS	Cash flow from operations to sales	Gombola, Haskins, Ketz, and Williams (1987)
CFOTA	Cash flow from operations to total assets	Back, Laitinen, Sere, and van Wezel (1996)
SIZE	Log of total assets	Shumway (2001)
SIG	Idiosyncratic standard deviation of past returns	Shumway (2001)

Table 2. Means, standard deviations, and significance of differences between distressed and healthy firms

Variable	Standard deviation		Mean		Mann–Whitney U test
	Healthy	Distressed	Healthy	Distressed	Significance of mean difference
NITA	0.122	0.219	0.056	0.028	.000**
RETA	0.274	1.454	0.246	−0.688	.000**
ETA	0.109	0.218	0.101	0.061	.000**
QACA	0.224	0.243	0.599	0.616	.079*
CATL	28.698	8.536	3.289	1.564	.000**
CACL	5.044	4.239	1.734	1.001	.000**
WCTA	0.224	1.042	0.081	−0.541	.000**
TLTA	0.205	0.996	0.561	1.268	.000**
INTC	71,234.5	734.658	2,498.04	−32.305	.000**
TETL	4.606	3.861	1.498	0.34	.000**
WCLD	5,225.34	336.464	−144.11	−59.648	.000**
CFOTL	0.799	2.964	0.2810	0.217	.000**
CFOS	8.335	7,333.44	−0.09	−428.95	.000**
CFOTA	0.193	0.395	0.099	0.054	.000**
SIZE	0.949	0.882	1.7643	0.834	.000**
SIG	2.378	0.566	0.392	0.345	.000**

Note: NITA is net income to total assets, RETA is retained earnings to total assets, ETA is earnings before interest and expenses to total assets, QACA is quick assets to current assets, CATL is current assets to total liabilities, CACL is current assets to current liabilities, WCTA is working capital to total assets, TLTA is total liabilities to total assets, INTC is EBIT to interest charges, TETL is total equity to total liabilities, WCLD is working capital to long-term debt, CFOTL is cash flow from operations to total liabilities, CFOS is cash flow from operations to sales, CFOTA is cash flow from operations to total assets, SIZE is log of total assets, SIG is idiosyncratic standard deviation of past returns.

* The difference between healthy and distressed series is significant at 10%.

** The difference between healthy and distressed series is significant at 5%.

Table 3. Pairwise correlation for the logit model

Variables	NITA	RETA	ETA	QACA	CATL	CACL	WCTA	TLTA	INTC	TETL	WCLD	CFOTL	CFOS	CFOTA	SIG	Size
NITA	1
RETA	.099**	1
ETA	.825**	.125**	1
QACA	.041*	−.056**	.024	1
CATL	.011	.042*	.007	.041*	1
CACL	.074**	.100**	.071**	.089**	.542**	1
WCTA	.094**	.870**	.127**	−.008	.076**	.181**	1
TLTA	−.075**	−.888**	−.092**	−.019	−.058**	−.163**	−.911**	1
INTC	.041*	.031	.047*	.044*	.003	.019	.022	−.029	1
TETL	.086**	.148**	.074**	.137**	.601**	.767**	.198**	−.243**	.013	1
WCLD	.008	.015	.016	.028	.003	.006	.024	−.023	.001	.008	1
CFOTL	.362**	.051**	.367**	.070**	−.157**	.132**	.134**	−.128**	.024	.162**	.007	1
CFOS	.022	.047*	.028	−.034	.002	.006	.017	−.034	.001	.008	−.001	.008	1
CFOTA	.769**	.086**	.690**	.019	−.004	.067**	.149**	−.080**	.034	.053**	.012	.415**	.036	1
SIG	.036	.021	.047*	−.037*	−.006	−.005	.014	−.010	−.004	−.005	.003	.005	.002	.031	1
Size	.237**	.409**	.291**	.260**	.020	.064**	.356**	−.378**	.051**	.087**	.025	.115**	.033	.160**	.063**	1

Note: NITA is net income to total assets, RETA is retained earnings to total assets, ETA is earnings before interest and expenses to total assets, QACA is quick assets to current assets, CATL is current assets to total liabilities, CACL is current assets to current liabilities, WCTA is working capital to total assets, TLTA is total liabilities to total assets, INTC is EBIT to interest charges, TETL is total equity to total liabilities, WCLD is working capital to long-term debt, CFOTL is cash flow from operations to total liabilities, CFOS is cash flow from operations to sales, CFOTA is cash flow from operations to total assets, SIZE is log of total assets, SIG is idiosyncratic standard deviation of past returns.

**Correlation is significant at the 0.01 level (2-tailed).

*Correlation is significant at the 0.05 level (2-tailed).

Table 4. Variance inflation factor results

Variable	Tolerance	VIF
NITA	.263	3.806
RETA	.211	4.746
ETA	.358	2.790
QACA	.948	1.054
CATL	.561	1.784
CACL	.407	2.460
WCTA	.137	7.315
TLTA	.123	8.120
INTC	.920	1.087
TETL	.406	2.463
WCLD	.998	1.002
CFOTL	.566	1.768
CFOS	.882	1.134
CFOTA	.335	2.989
SIG	.993	1.007
Size	.991	1.009

Note: NITA is net income to total assets, RETA is retained earnings to total assets, ETA is earnings before interest and expenses to total assets, QACA is quick assets to current assets, CATL is current assets to total liabilities, CACL is current assets to current liabilities, WCTA is working capital to total assets, TLTA is total liabilities to total assets, INTC is EBIT to interest charges, TETL is total equity to total liabilities, WCLD is working capital to long-term debt, CFOTL is cash flow from operations to total liabilities, CFOS is cash flow from operations to sales, CFOTA is cash flow from operations to total assets, SIZE is log of total assets, SIG is idiosyncratic standard deviation of past returns.

Table 5. Logit regression results of estimation model I

Variables	B	Sig.
NITA	9.963	.001***
RETA	−1.832	.000***
ETA	−8.168	.002**
QACA	−0.740	.075*
CATL	0.215	.011**
CACL	0.108	.095*
WCTA	−1.876	.002**
TLTA	8.377	.000***
INTC	−0.016	.028**
TETL	−0.050	.593
WCLD	0.000	.328
CFOTL	0.593	.292
CFOS	0.044	.033**
CFOTA	0.122	.901
SIG	0.015	.739
Size	−0.250	.023**
Adj. R^2		0.60

Note: NITA is net income to total assets, RETA is retained earnings to total assets, ETA is earnings before interest and expenses to total assets, QACA is quick assets to current assets, CATL is current assets to total liabilities, CACL is current assets to current liabilities, WCTA is working capital to total assets, TLTA is total liabilities to total assets, INTC is EBIT to interest charges, TETL is total equity to total liabilities, WCLD is working capital to long-term debt, CFOTL is cash flow from operations to total liabilities, CFOS is cash flow from operations to sales, CFOTA is cash flow from operations to total assets, SIZE is log of total assets, SIG is idiosyncratic standard deviation of past returns. Coefficients marked ***, **, and * are significant at the 1%, 5%, and 10% level of significance, respectively.

Table 6. Classification accuracy for model I

Observed	Predicted
	Healthy	Distressed	Percentage correct
Healthy	1,692	23	98.7
Distressed	135	179	57
Overall percentage			92.2

Table 7. Logit regression results of model II

Variables	B	Sig.
NITA	10.594	.000***
RETA	−1.954	.000***
ETA	−7.774	.002***
CATL	.223	.003***
WCTA	−1.146	.030**
TLTA	8.274	.000***
INTC	−.015	.031**
CFOS	.044	.020**
Size	−.252	.020**
Adj. R^2		0.59

Note: NITA is net income to total assets, RETA is retained earnings to total assets, ETA is earnings before interest and expenses to total assets, CATL is current assets to total liabilities, WCTA is working capital to total assets, TLTA is total liabilities to total assets, INTC is EBIT to interest charges, CFOS is cash flow from operations to sales, SIZE is log of total assets. Coefficients marked ***, **, and * are significant at the 1%, 5%, and 10% level of significance, respectively.

Table 8. Validation test results for model II

Observed	Predicted
	Healthy	Distressed	Percentage correct
Healthy	1,690	25	98.5
Distressed	138	176	56.1
Overall percentage			92.0

Table 9. Validation test results for holdout model

Observed	Predicted
	Healthy	Distressed	Percentage correct
Healthy	716	11	98.5
Distressed	54	79	59.4
Overall percentage			92.4

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