Financial Distress and Bankruptcy Prediction: Evidence from Ghana

Abstract

The frequent cases of corporate failures within the financial sector raises the need to employ models to predict forehand the financial distressed or bankruptcy state of the financial sector. This study aims at predicting financial distress and bankruptcy on selected listed banks on the stock exchange of a developing West African country, Ghana. Data used for the study spanned from 2008 to 2014. The Altman Z-Score and Boone Indicator were the main techniques of analysis. The study concluded that poor corporate governance contributes to financial distress and that smaller board size negatively affects corporate performance. The study also concludes that, in a highly competitive industry, firms become more efficient and their performance enhance and thus are less likely to be financially distressed. Merging the listed banks indicates financial stability of listed banks albeit one distressed bank. Adoption of best corporate governance standards, enhancing competition through effective corporate strategies and the assurance from the Central Bank that banks have enough deposit insurance funds in stock to mitigate the effect of bankruptcy are some of the policy suggestions derived from this study.

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