THE IMPACT OF FINANCIAL DISTRESS ON FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS LISTED AT PAKISTAN STOCK EXCHANGE
Keywords:
Firm financial performance, financialdistress, KMV model,, Distance to Default,, Netprofit marginAbstract
The matter of firm financial performance and financial distress has prevailed in ample rational discussion in the last two decades. Financial performance is the company’s ability to manage and control its resources. The financial robustness of the firm is determined by its financial performance over a specific period of time. The main purpose of this study is to determine the impact of financial distress on the financial performance of manufacturing firms listed on the Pakistan Stock Exchange. This research is conduct to assess the financial distress condition in the manufacturing sector of Pakistan. The random effect regression model and the KMV (distance to default) model are use in this study to investigate the impact of financial distress on firm financial performance from 2016 to 2020 by using an unbalanced panel data set. The data used in this study is secondary data involving 130 manufacturing firms listed at PSX. Statistically, the hypothesis claims that financial distress has a negative and significant impact on firm financial performance, and other control variables such as firm size, net profit margin, and sales growth have a positive and significant impact on firm financial performance, or market to book value has a positive but insignificant impact on financial performance. This study concludes that financial distress has a negative impact on manufacturing sector firm financial performance by using the KMV (distance to default) model in the case of Pakistan. The consequences of this research is beneficial for the management of manufacturing sector, and also adds up value in existing body of literature. For the shareholders and creditors of the manufacturing organization, this study add value by providing the information regarding financial health of the organizations. Policy makers would be better able to frame effective policies regarding manufacturing sector financial performance.
