THE EFFECT OF FINANCIAL DISTRESS ON CORPORATE PROFITABILITY: A PANEL ESTIMATED GENERALIZED LEAST SQUARES (EGLS) APPROACH
Keywords:
Altman‟s Z score, corporate bankruptcy, profitability, ROA, ROE, NPM,, GPMAbstract
The paper aims to clarify the relationship between financial distress and corporate profitability from a developing country context. Financial distress was proxied using the Z score developed by Altman (1968); while, the profitability indices were Return on Assets (ROA), Gross Profit Margin (GPM), Return on Equity (ROE) and Net Profit Margin (NPM). The study used the ex-post facto research design. The sample comprised all quoted consumer goods manufacturing firms listed on the Nigerian Stock Exchange (NSE) as at December, 2017. The study used secondary data; obtained from annual reports and accounts of the studied companies. The study employed Panel Estimated Generalised Least Squares, using cross-sectional weighting to validate the hypotheses. Firm size and leverage were included in the model as control variables. The study documents mixed findings; financial distress had a positive significant effect on return on assets; but, a negative significant effect on gross profit margin. The effect on return on equity and net profit margin were positive but non-significant.
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