Effect of financial distress on firm’s performance of non-financial firms registered with Pakistan Stoke Exchange

Abstract

The purpose of this Research study is to analyze the effect of financial distress on firm’s performance of non-financial firms registered with PSX. The causal-effect research design is used to conduct this study in order to judge the effect of financial troublesome on performance of non-financial firms. In this study the firm performance is taken as dependent variable and the financial distress of the firm as independent variable. While the variables of leverage and size is taken as controlled variables. The population of the study is comprised of all the companies which are related to the non-financial sector and whose shares are traded in Pakistan stock market. One sixty one corporations, listed on PSX have been chosen as a sample which represent the whole population of non-financial companies. The technique which is adopted to select the sample for this study is convenient sampling technique. The data of the sample companies are taken out from Firms’ annual accounts of including balance sheets, P/L Statement, changes in equity statements etc. Data was analyzed in this study by using the software of MS office and SPSS. Analyzed data covers the time span of six years from 2011 to 2016. The gathered data which is sorted and ordered in Excel sheet is analyzed by using multiple discriminate model that is Altman’s Z-Score model for measuring the financial distress variable, while Tobin’s q is applied to measure the firm performance for analysis of non-financial companies. Finally, through the establishment of regression equation between both the study variables the impact of distress on firm performance is determined. The main findings of the undertaken study provide the evidence that the performance of publically traded non- financial Pakistani companies are negatively affected by financial troublesome and the relationship between both the variables is significant. It means the result reaffirms the findings of Tan (2012), which shows that financial distress results in poor firm’s performance. Further, the results indicate that the symptoms of distress existed in the firms of Pakistan as indicted by the Z-Score index, during the period of 2011-2016 and it can be concluded that if necessary actions are taken on the basis of these symptoms then the chances of losses can be minimal in future. The study also explored that high leverage is not a beneficial way of raising funds for running the operations of the firms listed on PSX. This conclusion is drawn on the basis of findings that shows the firm’s performance in the presence of high debt will be negatively affected, So higher financial leverage results in lowering the firm’s performance and vice versa.