PREDICTING FINANCIAL DISTRESS IN MALAYSIA AND ITS EFFECT ON STOCK RETURNS

  • Ahmad Harith Ashrofie Hanafi Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Malaysia
  • Rohani Md-Rus School of Economics, Finance and Banking Universiti Utara Malaysia, Malaysia
  • Kamarun Nisham Taufil Mohd School of Economics, Finance and Banking Universiti Utara Malaysia, Malaysia

Abstract

Unstable economic conditions have an adverse impact on the financial performance of firms, leading to financial distress, which is an unfavourable situation for investors as it may affect their investment returns. Thus, this study attempted to predict financial distress and to examine the effect of financial distress on stock returns by using firms listed on Bursa Malaysia from 1990 to 2020. This study used the logit model to find the probability of bankruptcy and also as a proxy for financial distress risk in the asset pricing model. From this study, financial distress risk was found to be insignificant in pricing stock returns in all tested models. This finding demonstrates that financial distress risk does not affect stock returns since this risk may be eliminated through diversification.

Published
2021-06-15
How to Cite
HANAFI, Ahmad Harith Ashrofie; MD-RUS, Rohani; TAUFIL MOHD, Kamarun Nisham. PREDICTING FINANCIAL DISTRESS IN MALAYSIA AND ITS EFFECT ON STOCK RETURNS. International Journal of Banking and Finance, [S.l.], v. 16, n. 2, p. 81-110, june 2021. ISSN 1675-722X. Available at: <http://e-journal.uum.edu.my/index.php/ijbf/article/view/ijbf2021.16.2.4>. Date accessed: 20 sep. 2021. doi: https://doi.org/10.32890/ijbf2021.16.2.4.