Cash holding and investment efficiency nexus for financially distressed firms: The moderating role of corporate governance

The current research study aims to analyze the impact of cash holding on investment efficiency by moderating the role of corporate governance among financially distressed firms. The data for 14 years (2006-2019) is gathered from 400 companies of two Asian emerging economies (Pakistan and India). The results are obtained by applying a generalized method of moments (GMM), which postulates that corporate governance improves cash holding with investment efficiency in the Indian scenario and decreases in the Pakistani scenario. Concerning financially distressed firms, corporate governance strengthens the relationship of cash holding with investment efficiency in the Pakistani context but showing no moderating role in the Indian scenario. The results are helpful in cash management decisions to minimize the agency issue and to avail investment opportunities.

Is there a Dark Side to Societal Trust in Auditors’ Going Concern Assessments?

Amidst heightened concern among U.S. and international regulators, is the need to examine reasons why auditors are not issuing going-concern opinions (GCOs) to financially distressed clients who seem to warrant such opinions. We examine societal trust as one such reason, finding a lower incidence of GCOs with high societal trust. Moreover, we find that high societal trust is associated with fewer GCO Type I misclassifications, but more GCO Type II misclassifications. In addition, the association between societal trust and GCOs does not disappear for severely distressed clients, suggesting that auditors do not adequately perceive clients that warrant GCOs when the clients are in high trust countries, and illuminating a dark side to societal trust. Moreover, low litigation risk and auditor-management relationship longevity exacerbate this dark side of societal trust. Our study highlights how societal trust can have beneficial effects across multiple economic contexts while posing problems in the auditing context.

Corporate Innovation and the Auditor's Assessment of Going Concern

In this study, we examine whether external auditors assess corporate innovation activities when considering a financially distressed client's ability to continue as a going concern. Using patent count, patent market value, and patent citation to measure the firm-level innovation output, we document that higher quantity and quality of innovation activities are associated with a lower likelihood of going concern opinions. The association between innovation and going concern opinions is more pronounced for audit offices with high exposure to corporate innovation and clients operating in R&D-intensive industries. In additional analyses, we confirm that innovation is associated with future business value, as measured by future profitability and intellectual property licensing agreements. We conclude that corporate innovation represents a mitigating factor when auditors consider whether a going concern opinion is appropriate for a financially distressed client.

Financially Distressed Firms: Environmental, Social, and Governance Reporting in Indonesia

This study examines the relationship between financial distress and environmental, social, and governance (ESG) disclosure. We hypothesize that financially distressed firms are tempted to enhance ESG disclosure as it provides higher performance in terms of financial and market perspectives. ESG disclosure needs substantial resources, which financially distressed firms may not be able to provide. In Indonesian settings, we find that financially distressed firms have lower ESG disclosure quality than non-distressed firms. Our results are robust due to lagged variable, Heckman’s two stages, and coarsened exact matching regression showing consistent results. Furthermore, our results are consistent with three years of rolling windows of financial distress and all sections of ESG reporting, except the general information section. This study extends the scope of prior studies by focusing on firms’ eagerness to provide higher quality ESG disclosure, particularly distressed firms.

Financial Stress and Health Considerations: A Tradeoff in the Reopening Decisions of U.S. Liberal Arts Colleges during the COVID-19 Pandemic

This paper presents empirical evidence on factors influencing choices made by members of the Annapolis Group of Liberal Arts colleges regarding whether to operate primarily in-person, primarily online or some flexible alternative during the COVID-19 pandemic of 2020. This paper examines the tradeoff between public health risks and financial standing that school administrators faced when deciding reopening plans. Because in-person instruction at colleges and universities had large effects on COVID-19 case rates, it is critical to understand what caused these decisions. We used binary and multinomial probit models to evaluate an original data set of publicly available data as well as data from the College Crisis Initiative. Binary and multinomial choice model estimates suggest that conditional upon the prevailing level of COVID-19 in their county, financially distressed colleges were approximately 20 percentage points more likely to opt for primarily in-person operations than less financially distressed colleges. These choices highlight an important potential tradeoff between public health and financial concerns present in the higher education sector and emphasize the need for public spending to mitigate adverse health outcomes if a similar situation occurs again.

THEORIES OF CORPORATE INSOLVENCY: A PHILOSOPHICAL ANALYSIS OF THE CORPORATE RESCUE MECHANISMS UNDER THE COMPANIES ACT 2016

This paper aims to provide an examination of the theories that underpin corporate insolvency as developed in the US and the UK, and apply that to the two novel corporate rescue mechanisms; the corporate voluntary arrangement and judicial management, which are embedded in the Companies Act 2016 (CA 2016) of Malaysia. This paper adopted a doctrinal and theoretical approach to law. The tension in the corporate rescue mechanisms in the CA 2016 between creditors and other stakeholders of a company affected the objectives on corporate insolvency in Malaysia. This paper identified the theories that are reflected in the corporate rescue mechanisms in the CA 2016– a gap within the provisions which was left out in the process that ranged from consultancy and leading up to the drafting of the CA 2016. In addition, the objectives of introducing the corporate rescue mechanisms were identified. These findings may pave the way to reform the corporate rescue law in order to enhance its conformity with the objectives of corporate rescue in Malaysia. This in turn would facilitate the recovery of financially distressed companies and the minimisation of the loss of employment.

Indirect financial distress costs in non-financial firms: evidence from an emerging market

Purpose This study aims to analyse 508 financially distressed firm-year observations for the period 2010–2018 of Pakistan Stock Exchange (PSX) listed firms to examine the magnitude of indirect financial distress costs (IFDC) and to investigate which firm-specific variable is relatively important in explaining these indirect costs. This will not only enrich empirical literature but also helpful in cross-country comparison. Design/methodology/approach Optimal model selection along with panel data analysis technique is used to select the most optimal model to observe the findings. Financial distress is measure through Altman’s Z-score and firm-specific variables cover leverage, level of intangible assets, investment policy, tangible assets, firm’s size, level of liquid assets and Tobin’s Q of sample firms. Findings The findings of this study show that the average size of IFDC for the sample observations is 6.70%. In addition to this, finding further suggest that leverage, the level of intangible assets and changes in investment policy have positive while the size of the firm and Tobin’s Q have a significant negative impact on IFDC. Further, this paper argues that the level of tangible assets and liquid assets are statistically unimportant in observing the IFDC for PSX financially distressed firm-year observations. Practical implications The findings of this study provide more insight to corporate managers and investors about the association between firm-specific financial characteristics and IFDC concerning Pakistani firms. Furthermore, this study contributes to the existing literature by adding new evidence from developing countries such as Pakistan which are helpful for regulatory bodies and policymakers in the formulation of long-term strategies to manage the financial distress costs. Originality/value The study extends the body of existing literature on IFDC regarding Pakistan. The results suggest that policymakers may pay special attention to the quality of a firm’s capital structure strategies while predicting corporate financial distress costs.

THE IMPACT OF COVID-19 ON THE FINANCIAL PERFORMANCE OF PN17 AND GN3 STATUS FIRMS: DOES IT ADD SALT INTO THE WOUND?

The Covid-19 pandemic has brought about major changes to the Malaysian economic landscape in terms of productivity level, investment, and household spending. Nonetheless, the unprecedented presence of Covid-19 has caused an unexpected level of disruption to firms from a liquidity and leverage perspective that impacts financial performance. This study focused on financially distressed firms classified under PN17 and GN3 by Bursa Malaysia. Hence, the aim of this study is to examine the impact of liquidity, leverage, and the Covid-19 pandemic period on the financial performance of financially distressed firms in Malaysia which are classified as PN17 and GN3 firms. By using liquidity ratios, financial leverage ratios, and a dummy variable of Covid-19, the result showed that the current ratio, net working capital, and debt ratio were found significant to affect the financial performance. Meanwhile, there is no significant evidence to support that the Covid-19 pandemic has an impact on the performance of financially distressed firms. The finding indicates that the financially distressed firm’s financial performance was purely due to bad management practices, and not contributed by the Covid-19 pandemic.