Financial distress and bankruptcy prediction: an appropriate models for listed firms in Vietnam

Abstract

In this fast-changing world, it is likely that potential exposures are present in all economic sectors. In the emerging markets such as Vietnam, financial stability is always an important topic to attract attention from academics, practitioners, and policymakers. The Global Financial Crisis in 2008/2009 was the most recent event in which financial stability of countries has been tested. During or even after the crisis, many nations have been still facing macroeconomic problems in relation to unemployment, a reduction of output, firms’ bankruptcy and a sharp increase of firms’ default risk which all lead to a serious instability. Although Vietnam is the country with the second highest economic growth rate in Asia and one of a few new emerging markets in the world, the economy has also been suffered to the financial risk. This study is conducted to obtain the following three objectives. First, this study is to identify early warning indicators of corporate financial distress (or the financial risk) using the accounting-based and market-based models. Second, the study is to build an appropriate bankruptcy prediction model, one of its first kind in Vietnam, using market data for listed firms in Vietnam. Third, the above bankruptcy prediction model is then extended by incorporating macroeconomic factors which are widely considered as key factors affecting the financial distress and bankruptcy of firms, to be named “a comprehensive model of bankruptcy prediction” for Vietnam. A key objective of this study is to develop a comprehensive model, which is the first of its kind in Vietnam, for the purpose of financial distress and bankruptcy prediction for listed firms. Using a sample of more than 800 Vietnamese listed firms on the Vietnam’s stock exchanges in the period from 2003-2016, which is then sub-divided into the pre-global financial crisis (GFC) period (2003-2009) and the post-GFC period (2010-2016) to consider the financial distress likelihood in different scenarios. The Emerging Market Score Model (EMS) and the Distance to Default model (DD) are used to identify early the signal of financial distress. A new model is then proposed by incorporating various factors including (i) Accounting factors obtained from the EMS model; (ii) Market factors from the DD model; and (iii) Two macroeconomic indicators, the inflation and short-term interest rate which are widely used in the empirical analysis of the topic. The Area Under the Receiver Operating Characteristics (ROC) Curve (the AUC) is utilized to compare the usefulness of various default prediction models. Empirical findings from this study present evidence to support the view that factors derived from the accounting variables, market variables, and typical macroeconomic fundamental factors have all contributed effect to the financial distress of the Vietnamese listed firms for the research period when they are considered in isolation. However, when a comprehensive model is developed, the effect of accounting factors appear to be stronger in comparison with the market factors. Findings from this study also confirm that the model of default prediction including (i) accounting factors and (ii) macroeconomic indicators appear to be performing much better than the model including market factors and macroeconomic fundamentals. In addition, market variables are less likely to affect the financial distress than accounting and macroeconomic factors in both pre- and post-crisis periods. When the attention is on the sectors of the economy, findings from this study present evidence to support the view that Vietnam’s sectors have faced a high degree of financial risk. Among various industries, the largest exposure belongs to Consumer Staples sector whereas Health & Education sector is relatively safe in terms of financial risk. Findings from this study shed lights to meaningful policies from the Government in relation to the financial distress of firms in order to achieve a financial stability for the nation as a whole. Listed firms are also advised that their accounting indicators have also provided reliable indicators to minimize financial distresses and appropriate policies at the firms’ level should be considered.