Corporate financial distress models

MINISTRY OF EDUCATION & TRAINING

HO CHI MINH CITY OPEN UNIVERSITY

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TRAN HONG VU

CORPORATE FINANCIAL DISTRESS MODELS:

A COMPARISON OF THE TWO APPROACHES

MASTER THESIS

FINANCE AND BANKING

Ho Chi Minh City - 2018

MINISTRY OF EDUCATION & TRAINING

HO CHI MINH CITY OPEN UNIVERSITY

-----------------------------------------------

TRAN HONG VU

CORPORATE FINANCIAL DISTRESS MODELS:

A COMPARISON OF THE TWO APPROACHES

Major: Finance and Banking

Major code: 60 34 02 01

MASTER THESIS

FINANCE AND BANKING

Academic Supervisor:

Dr. Vo Hong Duc

Ho Chi Minh City - 2018

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DECLARATION

I, Tran Hong Vu, declare that the research work reported in this dissertation is my

own. It is submitted to fulfill the requirements for the Masters of Finance and Banking

degree at the Open University of Ho Chi Minh City.

This thesis has not, either in whole or in part, been submitted for a degree or

diploma to any other institution or university for a similar qualification except where

otherwise indicated and acknowledged.

There are no other research papers used in this dissertation that are not cited in

accordance with regulations.

This thesis has never been submitted to receive any degree at other universities or

training institutions.

HCMC, March 2018

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ACKNOWLEDGEMENT

Firsts of all, I would like to thank all the lecturers of Graduate School of Ho Chi

Minh City Open University that I have learned. The knowledge I have gained is the

fundamental foundation for me to complete this dissertation.

Next, I would like to express my sincere gratitude to my advisor Dr. Vo Hong Duc

for the continuous support of my Master thesis, for his patience, motivation, and

immense knowledge. His guidance helped me in the time of writing research proposal

and my thesis. I feel lucky thanks to having a devoted support and direction of my

advisor for my thesis.

I would like to thank my classmates for accompanying me throughout the school

year as well as during my dissertation. Your comments, encouragement and sharing

knowledge together helped me gain more confidence and motivation to complete this

thesis.

Thank you to the members of the Business and Economics Research Group of Ho

Chi Minh City Open University assisting me in the process of doing the thesis.

Finally, I would like to express my sincere thanks to my family, my beloved ones

for supporting me and during my study and dissertation.

In memory of my father…

.

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ABSTRACT

The research was conducted to provide empirical evidence for comparing the

differences in measuring and determinants affecting financial distress level of firms

using two models: accounting-based model (Z-Score) and market-based model (KMV -

Distance to default).

Throughout history in the field of credit risk research, many models have been

developed by researchers in measuring and predicting financial distress or bankruptcy.

The tested of research hypotheses are based on a sample of 631 non-financial listed firms

in the Vietnamese Stock Market (Hochiminh City Stock Exchange - HOSE - and Hanoi

Stock Exchange - HNX) in the period from 2006 to 2016, in which the crisis period is

from 2008 to 2012. The result showed that Asset-liabilities ratio, Rate of return on total

assets, Retained earnings to total assets ratio affect firm's financial distress. In particular,

Asset-liability ratio and Retained earnings to total assets ratio are proportional to

financial distress, Rate of return on total assets ratio is inversely proportional to financial

distress. The computed result of the financial distress level of two models (accounting￾based and market-based models) is differences because of the differences in the basis of

input information used. Industrials and Health Care sectors were warned to be the

highest risk of falling into financial distress sectors among the rest sectors. The

differences in the results of the two models also showed the information transparency

and the herding behavior problems in the market. In the economic recession of Vietnam

due to the impact of the global financial crisis (2008 to 2012), both two models showed

that the financial distress level was higher than the other periods.

The findings of this study provide empirical evidence for measuring and predicting

the financial distress of listed firms in the context of the Vietnamese stock market. This

result can be considered as a necessary reference for companies to improve their risk

management operations, especially in loan decisions to avoid having difficulty solvency.

In addition, authorities and market regulators can use these findings to formulate

effective management policies for companied, thereby boosting market development,

creating a safe investment environment for investors. Investors can also refer to the

research results to learn more about the sectors before making investing decision.

Furthermore, the research will be a stepping stone and encourage researchers to pay

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more attention to the field of forecasting financial distress. Once a company falls into

financial distress, bankruptcy is only a matter of time. Therefore, the forecast of

financial distress is very important in firm operations, it is the first step to help company

avoid bankruptcy.

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TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION................................................................................1

1.1. Research topic ....................................................................................................1

1.2. Research Objectives...........................................................................................2

1.3. Research Questions............................................................................................2

1.4. Research object and scope .................................................................................3

1.5. Research Contribution .......................................................................................3

1.6. Research Structure .............................................................................................3

CHAPTER 2: LITERATER REVIEW........................................................................5

2.1. Corporate financial distress................................................................................5

2.2. Financial distress and bankruptcy......................................................................8

2.3. Models of corporate financial distress...............................................................9

2.3.1. Accounting – based models...................................................................10

2.3.2. Market – based models..........................................................................17

2.4. Previous empirical studies ...............................................................................21

2.4.1. Accounting – based models...................................................................21

2.4.2. Market – based models..........................................................................23

2.4.3. Comparison of accounting – based and market – based models...........24

CHAPTER 3: METHODOLOGY AND RESEARCH DESIGN..............................28

3.1. Data ..................................................................................................................28

3.2. Selection of models..........................................................................................32

3.2.1. Accounting-based model (ZChina-Score model) .....................................32

3.2.2. Market-based model (DD model)..........................................................38

3.3. Hypotheses.......................................................................................................38

CHAPTER 4: RESEARCH RESULT AND DISCUSSION.....................................40

4.1. Research result.................................................................................................40

4.1.1. Variables description .............................................................................40

4.1.2. Empirical result......................................................................................42

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4.2. Discussion ........................................................................................................48

4.2.1. Empirical result of regression model.....................................................48

4.2.2. Z-score and Distance to Default ............................................................51

CHAPTER 5: CONCLUSIONS................................................................................63

5.1. Research conclusion.........................................................................................63

5.2. Policy Implications ..........................................................................................64

5.2.1. For the Vietnamese government............................................................64

5.2.2. For enterprises........................................................................................65

5.2.3. For investor............................................................................................67

5.3. Limitations and further research ......................................................................67

REFERENCE ............................................................................................................69