PREDICTING FINANCIAL DISTRESS IN MALAYSIA AND ITS EFFECT ON STOCK RETURNS

• Published in: International Journal of Banking and Finance Vol. 16; no. 2; pp. 81 - 110
• Main Authors: Hanafi, Ahmad Harith Ashrofie, Md-Rus, Rohani, Taufil Mohd, Kamarun Nisham
• Format: Journal Article
• Language: English
• Published: Kedah Universiti Utara Malaysia 01-01-2021
• Subjects: Bankruptcy; Economic conditions; financial distress risk; Investors; predicting financial distress; Risk management; stock returns; Malaysia
• ISSN: 1675-722X; 2811-3799; 2590-423X; 1675-722X
• DOI: 10.32890/ijbf2021.16.2.4

Unstable economic conditions have an adverse impact on the financial performance of firms, leading to financial distress, which is an unfavourable situation for investors as it may affect their investment returns. Thus, this study attempted to predict financial distress and to examine the effect of financial distress on stock returns by using firms listed on Bursa Malaysia from 1990 to 2020. This study used the logit model to find the probability of bankruptcy and also as a proxy for financial distress risk in the asset pricing model. From this study, financial distress risk was found to be insignificant in pricing stock returns in all tested models. This finding demonstrates that financial distress risk does not affect stock returns since this risk may be eliminated through diversification.