Post COVID-19 financial distress in Pakistan: Prediction of corporate defaults at Pakistan Stock Exchange

Authors

  • Khalid Mumtaz Khan Department of Management Studies, Bahria Business School, Bahria University, Islamabad, Pakistan.
  • Naeem Ullah Faculty of Management Sciences, Foundation University, Islamabad, Pakistan. https://orcid.org/0000-0001-8548-7564

DOI:

https://doi.org/10.47264/idea.lassij/5.1.25

Keywords:

firm failure, financial bankruptcy, distress management, Altman Z-Score, financial markets, risk hedging, market behavior, financial destress, financial statements

Abstract

COVID-19 has slowed down the global economic activity. This slowdown is expected to turn into an economic recession, where firms are expected to experience financial distress leading to corporate defaults. Predicting such defaults is important to safeguard the stakeholders’ interest in the financial markets. This study has estimated the extent of financial distress among the firms listed at PSX and constituting KSE 30 index, by using Altman’s Z-Score. The score has been computed using the financial statements of year 2019-20, and on the proforma financial statements for year 2019-20 and 2020-21. These financial years are considered as pre and post COVID-19 closing dates respectively for the financial statements. The proforma financial statements have been drawn for financial year 2019-20 and 2020-21 using established accounting conventions of prudence, conservatism, substance over form, and foreseeable future. The results of Z-score in pre and post COVID-19 have been compared to assess the change in degree of financial distress among the selected firms. A significant increase in the degree of financial distress has been observed, which may lead to an increased number corporate default for the firms listed at PSX. The firms and corporate regulators need to curtail the rate of corporate defaults.

Metrics

Metrics Loading ...

References

Anderson, R. M., Heesterbeek, H., Klinkenberg, D., & Hollingsworth, T. D. (2020). How will country-based mitigation measures influence the course of the COVID-19 epidemic? The Lancet, 395(10228), 931-934. https://doi.org/10.1016/S0140-6736(20)30567-5 DOI: https://doi.org/10.1016/S0140-6736(20)30567-5

Atkeson, A. (2020). What will be the economic impact of COVID-19 in the US? Rough estimates of disease scenarios (No. w26867). National Bureau of Economic Research. https://doi.org/10.3386/w26867 DOI: https://doi.org/10.3386/w26867

Asai, K. (2020). Limited liability and corporate efficiency. International Review of Law and Economics, 62, 105886. https://doi.org/10.1016/j.irle.2019.105886 DOI: https://doi.org/10.1016/j.irle.2019.105886

Baker, S. R., Bloom, N., Davis, S. J., Kost, K. J., Sammon, M. C., & Viratyosin, T. (2020). The unprecedented stock market impact of COVID-19 (No. w26945). National Bureau of Economic Research. https://doi.org/10.3386/w26945 DOI: https://doi.org/10.3386/w26945

Baker, S. R., Bloom, N., Davis, S. J., Kost, K., Sammon, M., & Viratyosin, T. (2020). The unprecedented stock market reaction to COVID-19. The review of asset pricing studies, 10(4), 742-758. https://doi.org/10.1093/rapstu/raaa008 DOI: https://doi.org/10.1093/rapstu/raaa008

Baldwin, R., & Tomiura, E. (2020). Thinking ahead about the trade impact of COVID-19. Economics in the Time of COVID-19, 59.

Caballero, R. J., & Simsek, A. (2009). Complexity and financial panics (No. w14997). National Bureau of Economic Research. https://doi.org/10.3386/w14997 DOI: https://doi.org/10.3386/w14997

Enderle, G. (2020). Corporate responsibility for wealth creation and human rights: a book project. International Journal of Economics and Politics, 1(1), 10-22. https://doi.org/10.29252/jep.1.1.10 DOI: https://doi.org/10.29252/jep.1.1.10

Feldman, E. R. (2020). Corporate strategy: Past, present, and future. Strategic Management Review, 1(1), 179-206. https://doi.org/10.1561/111.00000002 DOI: https://doi.org/10.1561/111.00000002

Hafiz, H., Oei, S. Y., Ring, D. M., & Shnitser, N. (2020). Regulating in pandemic: evaluating economic and financial policy responses to the coronavirus crisis. Boston College Law School Legal Studies Research Paper, (527). https://dx.doi.org/10.2139/ssrn.3555980 DOI: https://doi.org/10.2139/ssrn.3555980

Haldane, A. G., & May, R. M. (2011). Systemic risk in banking ecosystems. Nature, 469(7330), 351-355. https://doi.org/10.1038/nature09659 DOI: https://doi.org/10.1038/nature09659

Hofmann, C. (2020). The changing concept of money: a threat to the monetary system or an opportunity for the financial sector? European Business Organization Law Review, 21(1), 37-68. https://doi.org/10.1007/s40804-020-00182-z DOI: https://doi.org/10.1007/s40804-020-00182-z

Lukashov, R. (2020). Limited liability company as a private legal entity: selected legal issues. Actual problems of law, 1(4), 187-194. https://doi.org/10.35774/app2019.04.187 DOI: https://doi.org/10.35774/app2019.04.187

McKibbin, W., & Fernando, R. (2020). The economic impact of COVID-19. Economics in the Time of COVID-19, 45(10.1162).

Moodie, R., Stuckler, D., Monteiro, C., Sheron, N., Neal, B., Thamarangsi, T., & Lancet NCD Action Group. (2013). Profits and pandemics: prevention of harmful effects of tobacco, alcohol, and ultra-processed food and drink industries. The lancet, 381(9867), 670-679. https://doi.org/10.1016/S0140-6736(12)62089-3 DOI: https://doi.org/10.1016/S0140-6736(12)62089-3

Peckham, R. (2013). Economies of contagion: financial crisis and pandemic. Economy and Society, 42(2), 226-248. https://doi.org/10.1080/03085147.2012.718626 DOI: https://doi.org/10.1080/03085147.2012.718626

Roubini, N. (2008). The coming financial pandemic. Foreign Policy, 165, 44-48. https://www.jstor.org/stable/25462271

Spash, C. (2020). The revolution will not be corporatized. Environmental Values, 29(2), 121-130. https://doi.org/10.3197/096327120X15752810323968 DOI: https://doi.org/10.3197/096327120X15752810323968

Zimmer, S. M., & Burke, D. S. (2009). Historical perspective: emergence of influenza A (H1N1) viruses. New England Journal of Medicine, 361(3), 279-285. https://doi.org/10.1056/NEJMra0904322 DOI: https://doi.org/10.1056/NEJMra0904322

Published

2021-06-23

How to Cite

Khan, K. M., & Ullah, N. (2021). Post COVID-19 financial distress in Pakistan: Prediction of corporate defaults at Pakistan Stock Exchange. Liberal Arts and Social Sciences International Journal (LASSIJ), 5(1), 286–400. https://doi.org/10.47264/idea.lassij/5.1.25

Issue

Section

Research Articles | Original Articles | Original Research

Categories