Articlediamond2015

Impending Bankruptcy: Examining Cash Flow Pattern of Distress and Healthy Firms

23 citations0/0 files storedProcedia Economics and Finance

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Financial Distress and Bankruptcy Prediction Financial Analysis and Corporate Governance Corporate Insolvency and Governance

Abstract

Studies have proven that information on earnings has become less relevant to measure company performance during distressed situation. A relatively simple and convenient way to analyze a company's financial status is by using cash flow information. The present study examines eight types of cash flow patterns used as an alternative tool to predict financial distress incidence. The cash flow patterns derived from positive and negative signs of cash flow components which consist of operating, investing and financing activities. The data collected consists of 124 Malaysian public listed companies covering the period of 2006 until 2013. The main objective of the study is to find out whether there is any significant relationship between cash flow patterns and financial distress incidence. The results found that companies are more likely to experience financial distress situation when the company generates positive cash inflow from daily operation activities and use the cash generated to finance future investment and long term debt. Besides, the companies are also more likely in distressed situation when they are unable to cover its short term obligation due to insufficient cash inflows generated from the main operating activities. Distressed companies are more likely to acquire external financing since the excess of cash generated from operating activities is insufficient. When the company experienced outflows in all operating, investing and financing activities, there is high tendency for the company to go bankrupt. The results also revealed that there is a significant difference between distressed and healthy companies in incidence of different patterns of cash flow.

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References

2011Cash Flow Patterns as a Proxy for Firm Life Cycle 1985Classifying Bankrupt Firms with Funds Flow Components 2013Cash flow management and manufacturing firm financial performance: A longitudinal perspective 2014Detecting Fraudulent Financial Reporting through Financial Statement Analysis 2001The role of cash flow information in predicting corporate failure: the state of the literature 2011Ability of Combinations of Cash Flow Components to Predict Financial Distress 2008The role of accruals and cash flows in explaining security returns: Evidence from New Zealand 2005Cash flow patterns in listed South African industrial companies

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