CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
Financial distress is the situation when a company is not in a position to or face difficulty to pay off its financial obligations to the creditors. When fixed costs are high there is chance of causing financial distress to increases, assets are illiquid, or revenues that are too sensitive to economic recessions. A company which is in financial distress experiences several costs linked to the situation namely; exclusive financing, opportunity costs of projects and less dynamic employees. The cost of borrowing additional capital of the firm will generally increase, increasing the much desired funds to make it extra challenging and costly. To fulfill short-term obligations, management might
These characteristics can be easily measured by using available data on capital market authority. Firm size is one of the most influential characteristics in organizational studies. Chen and Hambrick (1995), and Mintzberg (1979) provide a summary and outline of the importance of firm size. Firm size is related to industry- sunk costs, concentration, vertical integration and overall industry profitability (Dean, 1998).Larger non-financial firms are more likely to have more layers of management, increased specialization of skills and functions, greater centralization, greater number of departments, and greater bureaucracy as compared to smaller non-financial firms (Daft,
It is usually measured by the current assets to current liabilities (current ratio). It shows the ability to convert an asset to cash quickly and reflects the ability of the firm to manage working capital when kept at normal levels. According to Subrahmanyam and Titman (2001), liquidity improves firm operating financial performance. Firms with more liquid assets are less likely to fail for they can realize cash at the time of need thus outperforming those firms with less liquid assets. Browne (2001) suggests that performance is positively related to the proportion of liquid assets in the asset mix of non-financial firms. Firms with higher liquidity allows it to deal with unexpected contingencies and also to manage its obligations during periods of low earnings (Liargovas & Skandalis,