-\ .---..'---".....

------

An Investigation
of ThaiListeCFirms'
Financial
DistressUsirrglMacroandMicro
Variables'

SuntiTirapat
Ch u Ia Io rrgkor n {Jnit'ersit1',T'hai Iond

AekkachaiNittayagasetwat.
lVationaI I':rrtitutc of'Devc|opmentAdministration, ThniIand

Thc erncrscnceofthe econorniccrisisin Thailandin i997 is an intcresring

casc for acadcmicsirrdies. intcmarionally, it had a contagioncffcct, spreading
to countricsin Asia and in othcr rcgions. Dornesricaily, it causeda grcatrrany
industrialand corporatebankruptcics.l'hc'I'hei cconomybad bccn rclativcll'
'fhc
s t a b l cs i n c c 1 9 8 4 . r c c c n td c v c l o p n i e nirn 1 9 9 7 ,h o r v * c r . p i o d . , r c c ad
srtrldcncconornicslurnprcsuliineir .:losurcso{'m;:nvT'hai corporations.Using
alcgitrc:rression,thisstldl'drl'clol:rnrnacro-rclalednricro-cri,;isinrt:stillarion
ir-.,.dcl. fhc significancc of rhc rncxlcl is in irs abiliry ro bridgc a llnl's
scnsirivitl'to macroc(:onornic coi'rcjitions and its finarriial charac-tcristics ilr
'ihe
order to cxplorc I fin:r's financial distrcss. findinirs indicarc rhlr
mrcrocconomicconditionsarecriticalirrdicatonolpotentialfinancialcri.sisfor
'fhc
a fi:-nr. article shows that the lrighcr a llnn's sensitiviq'to inflation,rhc
Iti3hcrthc firm's cxposurcto financialCistress.

Keyrrords:banilnrpicl,finanr:ial
clislrclr:;
crisis.

[. Introiluction

ht 1997, an Asian financialcrisis errlerrerl. i i c r l i i i r . r i l u dt,h cc n s r s

rapidlv spread throughout tlre rr'r,.ion. 'fh'; srviftness arrd ths
confoundingeffectsof the "Toni Yarn Kung" crisishavt-'iliset{ several

'Financial
supJmrt for lhis rcscnrcir rras providcd by tirc l_isltrl (jdjnpany ,\-ssmiarjon.
l'hailand. l-he authors apprcciale commcnts and suggmtions bv four aron;,nx:us reierecs anri
pxrllclp'rnts at prcscntatroilsal thc ll]ird Arrnual IlrrropcanFI\.I-n^
Con lir-ncc (l)arcclorra I 999). rhr
Sixth Annual Confrn:ncc of thc Multinat jonal l--irranccSocictv O'orurrro 1999), and t\c F,ltrffiih
-^.ruruaI I'ACAP/I:'M A t-inancc Con ftrcnce ( Sin gapor,: I g 99 ).

\;tlrltiilational f-inance Journcl, I 999, vol. 3, nr;. 2. pp. \)J..125)

4) &:{ultinationcl I;inance SocietS,,a noltorofit c.)rpo{a.-lon. Ail rillbts ;c:r:;r,r;l
 104
JlultinationalFinanceJournal

interesting
econonricquestions.rwhat rvasthe rootof the problem?
why was the crisis 'contagious'?what triggeredtrre tp".uruii""
attack? Theseissuestravehready been invesiigatedby prominent
economic scholars.Nunrerouscausesof thecrisistauebe"n'proposed,
rangingfromthc roreof financiar
panic(RacherandSachsI I 99{i]yto a
rtexusof ioral hazrrd problenrs(Corserti,pensenti,anO
Roubini
ilee8l).,
The crisis,howcver,has providedan opportunityto invcsiigate
anotherareaof interest,the role of corporatebankrupicy.
The imiact
of thecrisishasresulted in a rargen,rmb.,of rhai firmsloing bankrupt
in 1997.3Sincethe n.nssivebankruptcyis an exceptional
casein
Thailand, thisarticleair's to seekthecauslof this.u.,.,i.p.in. articles
o-npredictingbankruptcyfocusprimariryon financiali,ariables
suchas
financialratios,cashflo*'s,or accounti'gopinions.a rv{a'ystr.rdies rra'e
been co'ducted in deveroped countries^bccausedata are reacrily
available. In emerging markets, however, thislineof researcir i, ,.0.."
since,in grou.ingeconomies, bankruptfirms are actuallyrare.s,The
crisisprovidesus rvith an opportuniiyto invcstigate tlie prediction
modelindeveloping countrics suchasTiairand.An investigaiion o{'the
financialdistress moderrnaybe of interestandprovidescineinsights
into this areaof research sincethe Thai environmentmay difTerfrom
thatof thedeveloped markets on severaraspects. f int, theirstitutionar
structure of thc financiarseciorin Thairandcanbe characterizcd as e
bank-centere,d finaircial3),stcm. .,i,irh
in ctintra:rt thatc,1-a :tarket-blscij

I. "l'orn Yurn Kung" is a far.ous i-hai dish

and it l,"canrc rhe n*rne of tlrc 1997
ccont;miccrisis spreadingfrom'l'h:riland.
'l'hc
2. spcculativcanack_litcraturcis rcviervcdby Flood
and Marion (199S). Thc
contrrgiousnatureof tic.ri.:.!T bccn inrcstigatcOby t i.h*go"rL Rosc, and Wlplosz
( I 996) and rnorerccentlvby C lick and Rose(
I 9-9g).

I)uring 1992-1995, thc gro*.th ofaveragc net

.- .3. incomes offirms ristcd in the srocx
Exchangcof Thailandwas around2zo/owhire
in itre t q9o ii aecunearc - f | .3o/o-

O S]i,di:r}r:rtusconiyfinancialratiosincludecarlyworiissuchasllravcr(1Q66):rnd
^,
A l t r u n ( 1 9 6 8 ) . M u c h o f r h e r c c c n tw . r k i s
crisc.ssci n Alman and saundcn (t,i9g).
Studicst'at incorporateaccountturt opinions incrudct{opw; ct al. ( l 9g9) :rndF.ragg al.
( 1 , 9 9 1 )S m d i c s r h a t u s c o n r y f i n a n c i a l r a t i o s i n c l u d e c a r l y w o r k s n , . h a s B c a v c r ( l 9ct6 6 )and
Altman ( I 968), and Altman, l rardcman :rnd N".y"r,-
it riz). rr,tuch ofthc rcccnr work is
discusscdin Altman and Saun<rcn(199g) aarl
,avgrc'(l9sl). Stu<iicsrhar incorporatc
accorntantopinions includc I lopwood et al. (
I 9g9), Flagg et al. ( I 99 I ).

5 For cxamplc, in 'hairand fewer trranl0 companics

'l l.istedin rhc st<rckExchangcof
hailarxi were finarrcially distrcsse{ during
I 9g7- I 9d4.
 Invcstil1ationol' l;inanr:iu! l)istrc.s.s.forThui
Fir.nis 10,5

system such as that in the U.S. The credits froni

financiar institutions
(cornmercialbanks and financecompanies)
are about 5.5 tinreslarger
tharnfunds raised(in form of equity and bonds)
r'romcapitar markets"in
1994and16.7tinesrargerthanfundsraised in r997.i..""arr. il"
ownership
structure
in Thailandis highlyconcentrated.
Thcarcrage
percentage of commorr shares ownedby thethreerargest share horders
in the ten largestfirms is around 4i percent.u
iir. q.?i*i firi
conglomerateis conrroiledby famrrynna nignty
reverajedby rocar
financialinstitutions.Thisstmcturehasredto inefficicntinvcstments
beforethe 1997financiar 'fhe
crisis, ratioofearnings beforcintercsr and
taxes(liBIT) overinterest expenses decrined frornS.7g in 1994to 1.49
in 1991, rvhilethereverage ratiorosefrom r.5 to 2.95duringtiresame
pcriod.Thirdly,anecdotar evidence showsthatarthough theaccounting
sta'dardsin Thairandare simirarto those
of other inrenrarional
standards suchas the Intemationar AccountingStandard(rAS) or the
Financial Acco'ntingStandard Roard(FASB),theaccountirg practices
areof conccm.?Hence,it is interesting to ,.. whetheior noi financial
ratioscan appropriately explainthe causesof failureof firms in
developing counFiessuchasThailand.
In addition,an investigation of financiallydistressed firms in
emerglngmarkets, in our view, shouldtakeeconomicconditions
accountsincethesefirmsaretypicallysmall into
andoperating ;n un op.n
economy. N,h'eo.,,er, as a finn's lcccunting:ri.sicmii subjecito
accounting sroadard,e.g.,GenerallyAcceptedAccountingprinciples
(G^AP)' it scldomreflecrsimmediate
chang"si,r;;;.,r:, i-;tr,
situaiio. w'cn a crisis strikesthe overari
eco'orny. 'rherefbre,
accounting rariablesalonemaynotadequately explaina finn,sfinancial
distress, andt'e finn's sensitivityto n,,o....,..o,,,r,nic
ractorss'ourdbe
takenasa significant explanatory variableto indicatea fimr,sfinancial
distress.In ot'er words,fi.ms that u.a
-or. sensiti'eto econonric
shocksshouldbemoreproneto financiardistress
thanfirmstirarareress
sensitive.r'his articre'attempts to incorporate the macroeconomic
fattorsi'the investigation of financiallyattr.rs.a firms. Thepurpose
of incorporating mar;roeconomic variabres is to capfuretrresensitivirv

6. Scc La pona, Lopcz{e-Silanes,

Shlcil.er, and Vishy (199g), *tich compile
otr.ncrship conccncrationof 45 dcvclopc<l
and dcvclopinfcounrries.

7. Alba,Clacssens,andDjankw(199g)poimout*rataccountingandauditingpracticcs
in Thailard may be due to the rack of
strong sJrt-r"grr"a.yLganiz-ations in trreauditing
accountlng profcssion and a shortage and
of wettnuatinea u.'"o,'non,, and auditors.
 106
M u l ( i n a f i o n a l F i n a n c eJ o u r n a l

to cllangein macroeconorrric factors. This perspective,ir our vie\\,.ls

rrore consistentwith the Thai situation. using the rwo-sr.p
logit
approach,this stuclydevelopsa macro-rerared micio*risis invcsrigatiln
rnodel.It is found that the sensitivityof finns to
ecorornracorditions
pl.ys a nrajorrolcin dii'fcrcntiating thc financially<iisrressccl
c.r'panies
liorn tlre non-distrcssed ones.
'rhe
article is organizedas follows: section il reviewsprior
_. research.
The sampleand methodorogyare discussedin
sectioniI. rmpirical
resultsof the moder are reported in section IV.
The discussionof trre
findingsand conclusionsarepresentedin section
V.

II. Literature Review

A. Prediction of IJankmptcl,
Bankruptcy prediction modeis were pioneereci
by Beaver,s (1966)
unrvariatetestand Alrman's( l 96g) multivariate
discriminantanalysis.
I]oth articlesdocumentthat financialvariables
can be usedto pr"airt
bankruptcy. Since then, prediction of corporate
fairure hasbeena topic
of much interest and more recent works have
extencledthis rine of
rcsearchin threeareas:statisticaltechniques,
definitionsof bankruptcy,
variery of expianarory.ruiiobi.r. For cxamplc,
l:,1i^1.S."ut"r
( 1 ^ 9 . s 0 t . u t i l i zi 'r::cr !l c q i r Oirtsc,n
a c d p r o b i tr , , r . r r 1 ' sr oi sc s l l i r r a rrci r ep r o b a b i i i t l
. f b e n k r u p t c y . 1 ' h c a d j u s t m c n t so f c s r i ' r a t r o n
b i a s r e s u i t i n gi i c i r i
o v c r s a r n p l i n gs, ' c h a s u ' e i g h t sb a s c d
o n p r i o r p r o b a b i r i r i e si n t h c
estirriati.'proccssa'd optinralctit-ol1-poi't,
'l arediscusseci i'Znrije*,ski
( l 9 t l 4 ) : h e p r o b l e r r so | p o o r i n gd a t a
c i u et o a s r n a l n l u n r b eo r f sanrpres
a r e a d c i r c s s ei n d Z _ a r g r e(n1 9 g 3 ) .
'i'hc
s c c o n d a r c a o f e x r e n s i o n' a s d c a r t r v i t h t r r c
d c l r n i t r o ' so f
b a n k n r p t c y . I i o r c x a n r p l c ,a r n o c l c l t h l t
d i s t i n g u i s h e sb c t r v e c n
firra'cially distressedf irnrsthat surviveanti
finarrcialrydistrcssedfimrs
that ultimatclygo bankrupthasbeeninvestigatcd.
Gilbert,Menon, and
Schwartz( 1990)find ciifrerentexpra'atoryinanciar
variablesfor these
rwo groups of firms.. [n addition, a sample
firm may be classilieclinto
t*o...ul:.S.o.ies (bankrupt or nonbankrupt)
llil,-,h11 ancl the
crassrrrcatron probabiritiescan be esfimatecr by the murtinonriariogit
technique. For example, I{armon, and Gramlich (199?)
assigned firms into one of^poston, three groups according to each firm,s
fi nancialcondition:tumarounds,business
faitures,and survivors..Thev
lnr<'.rtigationoJ Financiul Distrt's.r.litrThui Firtt.t r07

find that financial ratios are not so useful in distinguishingbetween

financiallydistressedfirms that are able to turn aroundand thosc that
are unableto avoid failure. Johnscnand Melicher ( 1994),on tirc othcr
hand,suggestthat by usingmultinomiallogit modcls,the classification
ermrs can be signihcantly reduced.
The third area involves some adjustmentof erplanatorl,r'ariables
either by covering additional variables other than financial ratios or
industry-adjusted ratios. For example, Hopu'ood, McKeon'n, and
Mutchler (1989) and Flagg, Giroux, and Wiggins (i991) find that a
qualifiedopinion is significantin distinguishingfinanciallydistressed
firms. Some studies include macroeconomicvariables to control for
changesin the businessenyironment. Roseand Giroux (1982) e>lamine
28 businesscycle indicators and find that economic conditions affect
the failure process. Mensah (1983) evaluatesthe bankmptcy rnodel
usingthe price-leveladjusted(SPL) data.The findings indicatethat SPL
Catado not significantly improve bankruptcy prediction. Finally, Plan
and Platl (1990) control for industry differences by using industry-
normalizingratios. The industry-relativeframeworkresultsin stable
bankruptcymodels. Therefore,industrialpgouth hasa significant efTect
on corporatefailure. Irurthermore, Plattand Platt( 1991)investigate the
stabilityand cornpletencss of a bankruptcymodel basedon industry-
relativeratiosconlparedto tlilt ofunadjustedratios.8
-i
I-Jotl modcl., .,'ici,Jstatti,: pili-a!r'- icr cstiinlti.uri. nr inJristry'-
r c l a i i v e s p c c i f i c a t i r r nl,l o r v e v e r ,a p p r : a n l o p r o v i d c i l r l r c r n c n l u l
infonnationnot containcdin the model basedon the unadiusrcdratios.

IJ. Prediction ofCurrt:rrt:1'and RankingC)'iscu

Anothcr strandofrclatcd researchconcernsthc prcdictionofcunency

and banking crises; (br exantple, I)crnirguc-Kuntand Dctragiache
(1997),Eichengrecnand Rosc( 1998). 'f hcscstudicsare motivaredLry
the rccentspatcof criscsein Europe(Firrland,Sweden),Latin Anterica
(Mexico, Argentina)and Asia (Thailand,lndonesia). Kaminsky and
l { e i n h a r t ( 1 9 9 6 ) , i n a n a l y z i n g a s a m p l e o f 2 0 c r i s e s ,r e p o r r t h e
importanccof macrocconomicfactors in a crisis. Thcy docr.rrnent that

8. The spccificaticn ofthcir nxxlcls includes four financial ratios, s4lesgro*rh. and thc
intcractionof indusuy output and hnancial rariq;.

9 . C a p r i o a n d K l i n g e b i c(l1 9 9 6 ) d o c u r n c n t 4 g b a n k i n g c r i s ci nst h c l 9 7 0 s a n d 1 9 8 0 s ;
and 33 criscs occurrcxlovcr thc firut six ycarsofthc orescntdccade.
 I 08 t{ultinational Fin^nce Journal

output, the stock nrarket,and the real exchangerate usually peak about
a yearbeforethe onsetof a bankingcnsis. I{eai interestratesand ba.nk
depositsrise in the periodleadingup to thc crisis. Denrirguc-liuntrnd
Dctragiache(1997)applya rnultivariatelogit modelrothe determinants
of banking in a sampleof developedas u,ell as dcvelopingcountries
between1980and 1994.They find that in general,low grou.tlland higli
inflation are associaredrvith the probability of a banking crisis.
F:chengreenand Rose( 1998)restricttheir sampleto coveronly banking
crises in emergingmarketsflom 1975 through l992. Thcy apply a
multivariateprobit model to nine economic variables;four of their
lariab!es are"international" in nature,threeare "domestic". and trvo are
"external" in nature. Their results suggestthat banking crises in
emerging countries tend to occur in responseto e crtnjrrnctureof
uufavorable developmentsin intemational nrirrkets and clonrestic
i m b a l a n c e s . S p e c i f i c a l l y .r i s i n g i n d u s r r i a l - c o u n t r ifn t e r c s t n r c s
precipitatebanking crises: a one-perccntincrenssin interestratesis
associatedwith an increasein the probability of banking criscs of
aroundthreepercelrt.
Kaminsky, Lizondo, and Reinhart(1991) examine the empirical
evidenceon 25 currencycrisesand cornparethe merits of altemative
approachcsin providingearly indicationsof the crises.Tirey documcnt
that the best track record includes exporrs, cle'iations of the real
exchangerate fiirrn ihe trend,the ra.rirr of broaij ijtonc\,-cupplytogross
in(ernafionairesen'ss,ourput, antl erluity pnces. Kanriusky:nncj
Reinhart (1996) also investigatc76 currency criscs and 2(r banking
crisesand find thatbankingandcLrrrcnc)i crisesarecloselyrelatedin the
afternnth of financial libcralization,rvirh banking crises gcnerally
preceding crlrrcncycnrshes.

III. Data arrtl lle(hockrlogl,

l . S u n r l r ltct n l I ) o t u
'l'hc
sample includesfirms listed in thc stock rJxchangeof Thailand
(SI:-l')thatexperienced financiaIdistressin I 997. I]inancialrycli-ctre
ssed
{imrs are defined in this article as firms that eithcr ( i ) rvereclosecldonn
by governmentalauthorities(all of which wcre banks aird finance
companies)or (2) were nequiredby the Bank of l'hailand or SET to
submit restructuringplans (thesecompanieswere designaicdas C or
lnv<'stigalionoJ Financiol Distressfbr'l'hai Firrns 109

Sl''u by the Exchange).T'lrerewere 459 firms listedin the SE'l' iri 1996,
of which 55 were financially distressedby this definition. I'-irmsthat
were first listcd on thc SET in 1995or laterand firms rvith incornplete
dataare excluded.The resultingsampleconsistsof34l non-financially
distressedfirms and 55 financially distressedfirms. Thc characterisfics
of firms in the sampleare reportedin table i.

B. Method

,/rlthoughsorneprior research,e.g.,Rose,Andrervs,and Giroux ( 1982),

have included macroeconomic'"ariablesin the preclictionmodel, this
study differs on orle importantaspect. The purposeof incorporating
macroeconornicvariablesis not to control for chalges in the business
cnvironment but rathcr to capture the sensitivity to change in
rracroccorlonricI'actors. This perspcctive,in nur vicw, is nrore
c o n s i s t e nw t i t h t l r eT h a i s i t u a t i o r r .
The scnsitivityof firnrs to economicconditionsis expectedto play
a rnajorrole in differentiatingthe financiallydistressed companiesfrom
the non-ttistresscd ones. For ex,rmplc,an cntcrprise,which hasa high
:;ystcmaticrisk corrcspondingto macrocconomicconditions, e.g..
growth of inrlustrialproduction, inflation,changcsin intcrestratcs,and
c l r a n g e si n n r o n e ys r r p p l y( M 2 ) , n t a l , b c c x p o s c dt o t h c p o s s i b i l i t i , o f
l l n a n c i a ld i s t r c : , . ,I.n t l r i sa r t i c l t : t. h c n u l t i - f u c i o rr r t o d crl ' fD r c s c n ttsh c
rclationshipbctv,ccutire firrrr'sstockrr.:tuntandthe linn's scnsitivit.v to
nlacr()ccononricfaclors. In othcr worqjs,chlrrgcs in nracroeconcrric
llctr:rs and thc llnn's scnsitivityto thosechangeswill all'ectthe finn's
stock rctum. l-lren,the relationshipbctu'eenthe firm's probabilityof
llnancial distressand the firm's stock retr,rmis suchthat a firm, wliich
cncountcrs a high rcturn, will havc a low probability of financial
'ilris
rlistress. processneedsa two-stepanalysisrvhcrebychangesin
lnacroeconomicfactorsand the iimr's sensitivityto thoscfactorsaffcct
thc firrrr's stock rctunr, with a firm's stock rctunt in tunt hiiving arr
cffect on tlre firm's probability of financial distress.Therefore,tbe two-
s t c p l o g i t c a n b e a p p l i c d a s u s e d i n M a d d a l a( 1 9 8 6 ) . l ' h i s l i n e o f
nrethodologyhas also beenusedin Thomson(1992) and Theodossiou
ct al. ( 1996). I"orexample,thc studyby T'hon-rson (1992)uscsfwo-stcp

'l-hc
10. SEt posts a supcrvisionsign of "C" (thc fiting for compliancc;or "SP'" (the
sttspcnsion or thc tcmJxrcary
prohibitionoftrading until thc causcsofdclisting arccliminatcd)
against a listed companv and the frm musr submit thc SE'f d(xuments srrpportingthc
company's fi narr ial pcxition.
lt0 ]lultinational FinanceJorrrnal

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 Invcsrigtri,.,no.l' Financial Distre.s.rJbrThai
Firnr III

logit regressionapproachas a link between

official bank failure and
b a n k i n s o l v e n c y . T h e o d o s s i o ue t a l ( 1 9 9 6 )
a l s o r e e x a r n i n et h e
economic factors determiningthe decision to
acquire a financially
distrcssedfirm usinga sequentialresponselogit (SRL)
model. In their
modcl,acquisition,nonacquisition, anawealttiyoutcome s areexDresscd
as a two-stageSqquence of binary outcomes,healthy/distr.., in ,r"g.
one,and acquisition/non-acquisition in stagetwo.
Therefore,logistic discriminantanarysis
used in this articre wirr
apply this two-step idea in order to estimate
retum on a firm,s stock
a.d the' the estimatedstock return wiil be
used as a representationof
a macroeconomicsensifiviryindicatinga firm's
financiardistress.The
estimated stock return carculatedfrom the
murti-factor moder is
designedas a Iink to the micro-crisis moder.
In other rvords,the firm,s
estimatedretunr carcuratedfrom the murti-factor
(or macroeconomic
factors)model representstie macro effects
incorporatedinto the micro-
crisispredictionmodel.
Severalresearchers, e.g.,Beaver(1966) and Scott (l9gl), confirm
the relationship betueen a firm's proUaUility
of bankruptcy and the
Iinn's stock retum. But becausethe firm's
actuat stock return reflects
both tlie systematicrisk and firm-specific
risk, the motivation of the
tw.o-stcpis to captureonly the systematic
risk in which trrecco'omic
crisislrasaf]'ectedthe fr.'rs in tht economy
as a whore. In generar,the
micro*risis mo'-rerand the relatedr,',acro'factcr::
iinpi), thi foilorving
s p c c i l i c a t i o n(st l t c i n d i r e c r e s t ) :

prob(Y= 'r i\ -*
G exil- ZJ'
wherc

/,,=a*l,R +I" (l)

L-tl
i

R = Fn,,
*LF,,F, ,

4 is ass'igned thc varueof r if firm i is financratydistresscd

andtrre
valuco1'zero othcrwise,prob(y,:11istheprobability
with whichfinn
i is classifiedasa financiallydistressedfirm,
Z, is a lineart,nction
in whichrr,6,andc arecoefficients of variables, X,, is thefinancial
 I I2 ) l u l t i n a t i o n a l F i n e n c eJ o u r n a i

characteristic / of fiml i, 4 is the estimatcdmacroeconomicfactorl,

andR,is the estimatedmonthly stock return of t-irrni, specifiedas a
Iinearfunctionof thc macroeconomicfactor .
4
The probabiliry,Prob (Y,:l), dependson rhe logisricfunctionof a
linear relationshipof a set of variables including i, and ,!,. The
estimatedrnonthly stock retum of the firm i, ,Q,, can be calculatedfrom
a ntulti-factorrnodelin which theestimatedmacrocconomicfectors, ,
i
are usedto developthe model.The relationshipberwccna firm's
probabilityoffinancial distressand its stockreturnhasbeenpointedout
by Beaver(1968) and Scott (1981). While the first study showedthe
decline of a firm's stock return as the firm approachedfailure, the
secondconfinned that the probabilityof bankruptcvdependedon the
firm's stock return. Therefore,a I'irm's stock retr,rrnis a good reflection
of the marketexpectationof the firm's probabilityof financialdistress.
The acfualstock return,R,, however,representsboth systematicrisk
andfirm-specificrisk;e.g.,Ri = 0n,,*
0,.,F + e, , inwhichFrepresents
the systematicfacto(s) and e, containsthe firm-spccificrisk. Sincethe
finn's financial characteristics,cliscussedlatcr, are rclated to the firm-
specificrisk, the useof the actualstockreturn,togetherrvith the firm's
financialcharacteristics, as explanatoryvar-iables to the model u,ill be
a d o u b l ec o ' s i d e r a t i o no f t h c f i r m - s p e c i f i cn s k . r n a c r d i t i o nt .h c 1 9 9 7
cconomic crisis li:rssystr:rnaiically i',.rrhe r'l.,,erail iisrcd il:-rns,so the
motivatiouof thi:ssftrdyis an aftemptto f-rnda prox)'for systematicrisk
corresponding to thc firm's ba*kruptcy risl(. The estimation
specificationof R, will can e out thefirm-specificrisk and t;aptureonly
t[]e systematicrisk of the firm. Then the us. ^R,and financial
characieristicsconrbinesthe systemaficand finn-specificrisks as the
represcntationof explanatoryvariablesto themacro-related micro-crisis
r'odel u'ithout a redundancyof the fimr-specificrisk consideration.

C. [:ina nciu I vuri ult I es

Tlte set of variables,Xr,,representsfinancialcharactcristics

of the firm
i. Shivaswamy,I loban,andMatsumoto( 1993)studicdthirteen rcsearch
papersand summarizedthe frequency of financial ratios usedin those
papers. The most frequently used ratios were: current ratio, leverage
ratio, and profitability ratio. Altman and Altman et al. (196g, i9g3,
1984, 1994) developed numerous models predicting bankruptcy ancl
financial distress. In particular,Alhnan (19g4) surveyedstr.rclics on
 Inrestigttti.onof Financial Distres.s Ti.
for ti Firnn I 13

businessfailurelnodelsin variouscountriesatrd
rLrviewe(l tlreutiliz.:tion
of variable profiles employed in those studies. .fhe
nrost f *q"."r,y
used financial ratios were: working capital
to total assets,retainecl
carnirgsto total assets,
earningsbefbreinterest anclta.xe s to total assets,
markctvalue of eqrrityto totar riabilities,and
saresto total assets.
I bwever, the rireraturein trrisareaof finance
andaccountingshorvs
that researchersusually base their models
on the capital, assets,
mana_gement, eamings,and tiquidity of a firrq rvhichareihe
so<alled
CAMEL categories.FollowingSalchenberger,
Cinar,andLash( 1992),
the financial ratios ere categorizedonly
lio,n each element of the
CAMEL framervorli. The set of variables,Xo
follou,ing the CAMEL
categoriesis selectedas follows:

Capital: X, : book value of stockholden, equiry

i toral assets (SETA)
Assets: X, = retainedeamings / total assets(nffe)
Managementand Earnings: X, = operating
in"..,_e / net sales(OIN\
Liquidity: Xr: net working capitai/totalissets
(WCTA)
These four variableswilr be used as thc financiar
characteristicsof the
firms.in the sampleand as explanatory factors
to the rnodel.
The dependenceon a set of financial rutios
as a sole explanatoryset
of variables,however, lras raised a question
of u,hether they are
sufficientto explaina firm's financiarsituation
when the crisis sirikes
the econornyas it s'hore. 'r'hereasorris
tirai a il-.nr'saccountingsystem
r: pr".": to accounringstandard,e.g., Generally
Accepted n.J*"r",g
Principles(GnnP), and it r4ay not represent
a gootl rationalc for a
{lrm's financial distressdue tcr t'c economic
slunrp. So a 1ln',s
sensitivityto rnacroeconotnic factorsshouldbe included, u, .rpt^nntory
variablesto the finn's financiarcristrcss
a.crthc estimatcdstockrctunr
* ' h i c hi r r c o r p o m t ct sh c c r l ' c c.t r ' t h cr i n ' ' s
s c n s i r i v i t tyo ' r a c r ' e c o ' o n r i c
llctors shouldbc a good reprcscntation
of the macroeconomic factorfor
c x p l a i n i n gt h e l l r n r ' sp r o b a b i l i t yo f f i n a n c i a l
drstress.

I). Mu lti-jtc!rtr ntodcl

Demirguc-Kunt and Derragiache (lggl)

use ten r,.anablesas
macroeconomic factors in their logit model.
Ilowever, only four
variables (real quarterly GDi' g.o*th,
rear shor-t-terminte.est rate.
inflation, and M2 moneysupply to internarional
,.r"*.rf u." ,ig,r,fi;;;
variables,which can .*pluln the probabiliiy
of UunfCngcrises. These
four mar;roeconomic factors have
uiro been u,idely used
 I 14 - \ l u l t i n a t i o n a l F i n n n c eJ o u r n r r l

ccononlcl.rically.For the sampleof 't-heiccononrcconditious,nlonthly

groMh of tlre production-manufacturingindex rvill provide more
obsenations than will thc useof quarterly real GDp grorvth. Thcrefore,
the macro-factors,.F*,are selectedas follows:

.F, : monthly gowth of the production manufacfuringindex (plvfl)

f , : monthly inflation or changesin the consumerprice index (Cpl)
{: monthly changesin interest rates(iNT)
Fo = monthly changesin M2 money supply (MS2)

The estimatedchangesin the above economicconditionswill be

used to calculate the estimatedstock refurns of firm i accordine to the
following equation:

i - n-
i\i L,o.i+ f,,,F, + lJr.,F,+ F..,F. * F r.,F,

rtheref o.,isthe intercept andf ,.,,li,, frr, and

f)r,are coefficientsof
variablesrepresentingthe systematicrisks or the sensiriviryof firm i to
the changes in industrial production, consumer price index, interest
rates.and M2 money supply,respectively.
It slrculd be noted that for the spccificationin thc indir-ecttcst
(equationl), the estirnatedstock return is a contpletereilcction of the
s c n s i t i v i t yo f t h e f i r m l o m r c r o c c o , l , , r n icco n d i t i , r r r :sr : :, . c i l i r s 1 1 r , . :
! ) ) a c r o e c o n o l n iccc , i i , i i t i c ; n s .A l t e r r r a i i v c i y t, i,r c c l l e L . tr : i ' a f i r r l , s
sensitivity of mac;:occonomicfactors on rhe probability of tirc firll,s
financialdistresscan be specifietlas fbllorvs(the direct test):

rvhcre (2)
1.,= ri *Ltr^/l ^.,+lc,X ,.,+ e,.
^j

l'hc abovc rnodclreststhe cffect of the sensitivityof firn-rsin terms

of financial distressto four macroeconomicconditions: grorvth of
industrialproduction,inflation, changesin interestrates,and changes
in M2 money supply. In this direct tesr, rhe explanatory factors of ihc
fimr's probability of financialdishessincrudethe fi,'n's sensitivityto
macroeconomicfactors and the fimr's financial characteristics.
 lnvstigation o.l-Financial [)isrrcss]br Thui Firnt.s
I i5

fhe systematicrisks,flr.u of firm i are obtained fmnr the

regression
of the ntonthly stockrerumsof'rhe finn i at time /,. R,.,
on the monthly
macroeconomicfactorsat time 1,,Fj.,:r The equation
is such that:

R , = 0 n , t F , . , F , ,+ / J , F r . , + f l
r . , F , . , .fri , . , F r .+, e , , ,

where e,.,,the error ten.n,representsthe firm_specific

risk of thc finrr i
a t t i n r et .

IV. Empirical Results

The descriptivestatisticsof variabresare reportedin

tabre2, rvhirerhe
rcsultsofthe macro-reratcd microrrisis prcciicrion modcrs"botr indirect
and direct tests,are prcscntedir table 3. The resrrlts
i'dicate that rhe
estimatedstock return variabrecorrespondingto the
estirrnted chanses
in macroeconomicfactors is significantly
iifferent lio* ;.;. f;.
ncgativesign suggests that a firm witir a hjgherestimatedrate of rctunr
Itasa lower probabilityof financialdistr*ss.
The rationalehas been
pointedout by Beavcr (1966) as the declining
o{'a fimr's stock rerum
signalingthe firrn's vulnerabirityto the possiriirity
of banknrptc,v llrre
s i g r t i f i c a n cocl t h i : v a n a b r c( a tt t r c5 g i ,, i l n i l r c a r i c c
r c i , c ia i s o i n d i c a t c s
thc irrrportance of inacrcieconor'ic conditionsa'cl trroseconditionscan
stronglyinfluencethe probabiliryof the fimr's
'fhe financialdistress.
rcsultsol'the arternativedirect specification(cquatio'
2) are
also rcportcdin rablc 3. r'he resurtsindicatethat
the oriry significant
tttacrollctor is thc se'siri'ity of rheIlrnrs ro
inflationor crianfesin the
crnsu'rcr pdcc indcx. In otrrcrwords,onrythe
systematicrisk of a firm
exposed to inrlation atJ'cctsthc probability
o1' thc firrn's financiar
distrcss 1'hcsign suggcststlrattlrc more a Ilrnr
faccsinflation risk, thc
I r i g h c rt h c l l r r n ' sv u r r r c r a b i r i t yo t h e n s k o r ' { r ' a . c i a r
distruss.
I"or both altcrnativcnrodcrs(the inclirccttcst in
equatio' l and the
direct test in equation2), the financial clraracteristics
uch as
stockholders'equityto totarassets(SETA) and
working capirarro roral
assets(WC'|A) are significant at the l,'/o significance
ievel. The
relatio'ship is such that thc the Sb.TA and WCTA ratios. the
€Jrcater

'I1rc
I I' momhly deta of thc stock rcturn and tie mrcrrx-conomrc
ra."()rs r*rrc coilcctcd
starting fronr January I 987 ro Dec'cmberl 996. 'fherc
ftrrc,trrcrcare i 20 rnomlrry obsen arions
tllat arc crnploycd in rcgressing*rc stock return
ovcr drc nracrtxccrnornicfirtrxs-
 \ I u l t i n a t i o n a l F i n a n c e. l o u r n a l

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tcl-1-:C.9i\c
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a.l r -;
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3 =3 =,^ .-3li & u X; := -
9 ; i r . X a - .: '^- -i 6: ( ' 1 , l E €!Ei^=;
rnl
i tF- ,€. hYsit5, j'' s
i
u' ;'-e g[ 5:
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 ilfi
J l r r l t i r r : r t i o r r l lI . . i r l r n c c. f o u r n a l

T A I } L E 3 . 'l'he ,\{acro-related
Micro-trisis prediction .\{odels:
ltaranreters and Wald C h i - s q u a r e Estimated
Stt(is(ics in parentheses

E s t i m a t c so f
Ilstirnatcsof
Cocfficicnts Ela:;ticit/ Coclficicnrs [.lasticityb
Constant -.9036 nta - 1 .t 0 3 3 n/a
(ll.5l)'** /lt ??)*rr

Macroeconomic F a c t o r

_.503 . 3 0l . {
( 56 9 ) * *
f,,, _ _t 2
. 88 .079-s
(.i2)
.098(r .14i-5
(ti7;*'*
_ I ..5.19
7 169-s
(1.15)
/J.,,tt _ . 0 2I1 0703
I ; i n a n c i aI
(15)
Characrcrist
ic
.Sl:TA _3.506,s .7899 -3.1373 6993
. (I$.64;..*
(I 4.66;.**
RE7'/l -.J Jy)
.067-5 _ . 5 3I 3 . 0 0 38
(.28) ( . 6 5)
0/45 t6J . 1s 7 4 .t01i . 0t : 9
i .:il ) ( . . 1)e
It'('T.4 .i22ti .2046 _ .l l i l l9ti5
/? r?\+.+
((,.[i;"'
) | ,,.. I
l)y.u /t,
253.330
Modcl Chi-St;uarc (r().06rr+
6::80'**

) , l o t e : l ' o r r r r r r j c lI
7 r , , 1 i r ( |=; I ) = whcrc Z. =, +Ai. rr,.\..,.. I-or
#l .+ e x f { _ l , J I
t t m d c2l p r t t l { } ; = l ) =
=a+lt,,B, +1c,x,,,+c,.
l..,=,*'hcrcZ,
A,istnccsti,n.tc<r
nr.ntr,h
.,,11,1J- orthcfinn,. ,,:;"0.;",1"'.rr,.*",,.
tlrc scnsitiviryofa firrn to t'c changcs ,,.0,u.
in industrialprudu.tion .,/r,-r, rcprcscntst'c systcmatic
rtsks or tJrcscnsitiviryofa firm to thc
changcsin csrsunrcr pnce intlcx.
systcmatlcnsks.r thc scnsitivityofal'1nr /r*r.rcpresent-s t\c
to thc chirngcsin intcrcst r.tcs./,,s?rcprcscrts
systcmaticrisks or thc scnsirrvity tbe
of a firm to thc Jhangcsin M2 moncl,supply.
rcpr(:cnrs thc ratio of stcrckrx,rdcru'cquiq' ,9t27
ro t.tal asseti. lif 7il reprcscrrs
r c t a r n c d c a r n n g s t o t o t aal s s e t ; , l N S r c p r c s c n t s t h c m t i o o f o p c r a t i n g i n c o m cthc ratio of
t.,nclsarcs.
llcTxrcprcscntstheratioof*'orkingcapitaltototalassets.
parcnrirescsincludethcstandard
"TTr_in [ ],1-ralucs, for lJn: varianccs arc equal, in ( ), and t._t?lucs, for'n: means a_renor
significantlydifferent from zero, in +**,-**, ,n,l i
{ }. d"notc sraistcar significrrnceat rire

,r^V^ 1tz
tL 9 Tr1
,,1L,
AP Z
llr
 lnycrtigation o/' I:inancial Di,stressfor Thai Fjnrt.s. It9

l'ABLf,, 1. l'bc tsull+rmple Tcrr fs,r Modet I

Distrcssltrdiction Nondistrcsscdpruircuon l'ota] Prcdictnn

Accunry Accuracy Accrr:rcy
Clutoff
I'oint Amounl % Arnounl % Amount

0 55 t00.00% 0 0.00o/o 55 13.E9"/o

.l 48 87.270,'o 205 60.12% 253 63.89,4
.2 J-t 60.ffi% 294 86.77% 321 82.53%
-J 2l 38.t8% -ttJ 97.959'0 l4'1 E6.8T/r
t3 2J.64% 334 97.9596 l4't 87.63%
8 t4.55% JJO 98.53% 344 86.8r./0
6 lo.9lo/c 138 99.1?./o l4-1 86.874/o
."1 '727%
.4 319 99.4I o;i 343 86.624/0
.8 l 5.450/, 339 99.4lYo 142 8rr.16910
.9 2 3.61oio 339 (R.4lot'o t4l 8 6 . tI %
I U 0.00y" 34r 100.(X)ozi, :1,1I 86.1ro.,',"

l{otc: Fcr rno<lclI prob{Y, = l) - whac Z, = a t- b|,lc

; _:;;;. ,X ,.,
ii,= /)0.,tLp,.,i'..n",u-pr"Ll:':il;rlj. 'nnrrn*.r,icrr.].1r
,n'san:non.
distrcsscd
urd 55 finrs arehnanciallydistrcsrc,lin 1997.

:I'ABLE 5. The ln-ramplc'frst for

Mo{tel I

I)istrcsr i rtrlictrcrr \on-dis!rcr:,-,: Prcrircl ion i ' o 1 ; , 1l t r l r c l L t n

Acc:rncv Acaii(-ic), .{ccltif,c\
(\tofl
Itoint Antrunt ,i Anxrurrt /\-nx)unt 9

0 l0 I 00.00plo U 0.0091, 30 I2.9-a%

.l 25 8.].1-1";i' 154 th.62% '71.49"/b
I ?9
.l l5 50.000,/0 lE5 92.O19/o 200 86.-5ti7;
.l 1.5 50.()00/" 195 91.o2% 210 90.91%
.4 l2 40.u)% i99 t;r).01%r 2l I 91.34%
.t It) 33.33% 199 99.0lozi, 209 $ 48%
.6 l0 199 ,),1.t)
l,16 ?09 90.481'.
.7 {) 20.00% 199 99.01% 205 88.75"/"
.8 5 16.61T6 199 y).olr'o 2M 88.31%
.9 4 t333% t99 99.01% 203 E7.8n/e
I 0 0.0096 201 t00.u)% 201 87.01%

N o t cF
: o r n x x l cI l p r o \ \ - f ') = ; = f . *tcreZ,= u + b.A,lc,X,.,,
I + e x p ( -^2 , )
: ^ (-^ :
K,= Po.,* . T h c s m p l c i s d i v i d c d i n t o t u u s u b m p l c s : 6 0 4 / n o f r l rf eu l l s n { , l e a s
Lpr,,
lhc in-sirnplc(lcarnings"rnple)and4o7oofth€ full samplcas rheour-san)ple (holdours3mple).
120 !lultlnational Finance Journd

'l'hc for lllodel I

TABLE 6. Out-samplc'I'cst

DistrussPuliction \on { i grusqrl i're-diction I'otal Prcrlrction

Accuncy Ar.cunry Accumcy
Cutoff
Point Auxrunl ,Annrnt % Armunl

t.l 25 l00o/o 0 0.tr/" 25 I 5.15?i

l0:l
'17.57"/"
.t 22 88% 125 15.760,"
'lT/o
.2 l8 120 ll5.7l% ll8 83.fi%
.l ll 52% t26 x).009n I 19 84.24%
.4 ll 44% l3l 95.Vf/o 144 8'7.2i.h
.5 il 44r'o B5 96.4j"/" 146 88.4f/o
.6 5 2Oo/o 136 91.l4yo l.t I 85.46%
.'7 3 t2% t3'l 97 .860/. 140 8.1.85%
.8 2 8ot'o ll7 97.86o/0 139 84.24%
.9 \o/n 137 97.86Yo I l9 81.21%
I 0 e,^ 1,10 r00.00"4 140 84.85%

t^.
Notc: For nslel I proh(Y,=f) = . wirm Z, - o +6R r,X,.,
I
l + cxp(-./-, ;

A, = p,,.L p, F . Thcsmplcisdli&d i n t o t w o s u b s m p l e s : { P / o o f ' J r c f u l ls e m p l e x

thc in-sample (kxming sBnrpl€) and 40oloof tlE full s.emple ar the out-sample (holdortt sample).

-l
TABI,E ?. he l rrll+nmolc-[est for Mrxlcl 2

Distn.':s PsJictirrn \<r'r*lisir,-'s..'d Pm<lictiorr ii)tal Hiction

Accur:tr'y ,\Ltirrrcy i\ccumcy
('uloll'
or'" o/"
P0lnt Anx)uoi Anx)unl Atrx)ult 9a

25 1000,/. 0 0.lff/, 25 t5.t5%

I 22 11$o/o t03 13.57% t75 i5.'16%
2 t8 l?0 ti,s.7t% l31l 8J.(49'.c
.l il 520,'.o ll6 90.00,/. r39 84.24%
4 ll 44"A 113 95.00'zi l,t 1 8'1.219,',"
4.1',, r35 96.419/o t46 88.49',"
6 z.Ari 136 q'l .140/, l4l 85.46%
lt7 97.86% 140 84.85%
.s E% 91 .860/, l 19 E4.249i,
tt",i t_1 I e7.E6% I 19 1i.1.241/"
u/a 140 I ()0.00'ui 140 8,r.85%

I
l

lriote: For rnodcl2 profl.f, - l)' = --- -. whcrc,

I + exp(-Z,)
z , = d - L h ,p , . .- L c 1 , r ' ,+. ,. , .

Thesamtlcconristsof396firmsinstrich34lfnnsarenon{istresscdard55lirmsarcfnancially
distrgsd iD 199?.
Inrestigolion o.[ Financial Distruss Jbr Thui Firnts ll I

TARI.E & Thc lcrrarplc'fcrt for Modcl 2

Distrcssl\cdiction r-on{istrcssodlHiction J'otal Prcdiction

Accuracy Aacurxy Accuracy
Cutoff
Point Arnounl Arxilnl % Anx)unl %

0 30 I 00.00Plo 0 0.00o/. 30 t2.WL

't6.tT/,
.l 26 86.6-l'/o r53 179 17.4fi:o
.7 l?
56.67% l6J 9r.05% 200 86.5894
1 l5 50.007. 195 97.02% 210 90.91%
I J 43.33% 199 99.Ot% 212 91.7;i%
J II 36.6't% 199 99.0194 2i0 90.9t%
10.00% 199 99.01% 203 90.C49;
;l i 26.67y, 199 99.0I o,i 20-7 8 9 . 6r %
.E 5 16.67% 199 99.01% 20{ E . S .tt%
.9 13.33% ?00 99.50P/: lot E8.l10.,;
I 0 0.oo% 201 100.009.; 201 87.01%

Nole: FornxrCcl2,pr;:(/ = l)= -1--, $'h<Tr

' :
I + exp(-Z,)
. Zt=o*Lb,P,.,+lc,x,, +e,.
I t

Tlrcsrrnplcisdividedirtotwosubsampls:60/ooflhcfull sarnplcasthein-s.rn{rlc(}crmin5
srmplc) anrl aoel of ttrc full sarnplcas tlrc cut-saroplc(ho{dorrtsan'plc).

TABLE 9. Tbc Ovt+arnplc'I'esifor lttodcl 2

Distm: I-'rdiction Xon{i slr(-:r'cri Pttdiction l'olri Prerliction

Accrn:ri' Accurr; A(:ciincv
Culoff
Point Amoutrl o/e Arnounl o/. Arnount ,;

U l0 r00.009( 0 0.00% 30 t2.99%

',t'|.4f/o
.l 26 86.6-10/o 153 1 6.124/t r79
.2 t'7 56.61% r83 9 r .059i 200 86.58%
,] t5 50.00% t95 91.O2% 210 90.91%
l3 43.!3% r99 99.0t% 2t2 stjl%
36.6'1% t99 99.Oloh 2r0 90.91%
30.00% r99 99.01% 208 90.04%
.7 E 26.67% 199 99.0t% 201 89.61%
.8 5 t6.6'7% 199 w.0l% 20.{ 88.31%
o r3.33% 200 99.5V/, 2(x 88.3I 7i
I 0 0.t)OYo 201 lc0_0004 201 87.01%

Norc:Fbr nx>Jd2 pnit\l', = l) = ---!--, '.vhdr

l + cxpt-2,)
z , = o + 2 n , f , . ,* L c r x , . ,+ e , .
./
Thc snmplc is dirid<'d into two subsamplcs: 600/cof tlE full sarnplcas thc in-samplc(lcarning
sanrplc)ald 40"/t of thc full snrplc as thc out-sarnplc(hdddlt ramplc).
r22 ltrrttinationlrl FinanceJournrtl

lorver the probability ol'Frnancialclistress.Also, table 3 reports tlte

e l a s t i c i t i c sa.sd e{ r n e ci in l ' h e o d o s s i o re. lt,a l . ( 1 9 9 6 ) ,w l t i c l tr n e l s t r r ct h c
importanceo{'the variablesin the model.r2It can be seenthat SHTA
and R, for nto<lelI, ancl SETA and bcfl, for tnodel2, arc the most
i r n p o r t a nvi a r i a b l c sc, o n s i s t c nrtv i t l i t h c w a l d c h i - s q t l a r sc l i l t i s t i c s .
Tables4-9 shorvthe predictiveability of the nrlcro-relatedmrcro-
crisispredictionmodelsat variouscut-offpoints. Sincerype I enors are
more ;ostly than type II errorsrl, the srudy attemptsto determinea cut-
o{T point that correctly discrinrinatesthe distressedlinns at a greater
number than doesthe nondistressed firms or, in other words, in which
type I errors are approximatelysmallerthan type II errors' On average'
tire cut-offpoint at . I seemsfo be optimal, indicatingthat a firm that has
a probabiliiyof financialdistressof l0% or o'er will be classifiedas a
distressedfinn and 3 firm that has a probability under 10olowill b€
classifiedas a non-distressedfirm. The prediction results for the
indirect model (equation l) are shorvnin table 4{. At the cut-offpoint
of .1,the total predictionaccuracyeqmls to 63.89%for the full-sample
'15.16%
test,7'1.4f/o for the in-sarnpletest, and for the out-sampletest
as sho$,r.rin table 4-6. The prediction results for the direct model
(equation2) are shown intable 1-9. Ltthe cut-off point of '1, the total
predictionaccuracyequals to 68.43% frrr the full-sample test,lT .49Yo
ior the in-slmplericst, and "l0.gl% fr,i tiic ollt-sa11-llc 1,::;t ri sltorvnin
table 7-9. The out-lampk: prcciicti..,e abiliu* oi'o!''jr 70';i for both
modelssignifiespromisingoutcomesof this study'

and Discussion
V. Conclusions

the1997economic
Thisarticleemploycd asa casc
crisisin Thailand
stu<ly. Using logit analysis,the model altemptsto portray corporatc
bankruptcycausedby economiccollapseas systcrnatic risk' The Inacro-
relatedmicro-crisisexplorationmodel developed in this studyhas two
soecifications.The first specification (the indirect fest) uses firms'

l2.l.Jnlikcthclq8itcircfTicicnts,t}reetasriciryisinclcpcn<icntofnlcasurclncntttnits|tx
drc viriablcs.
hrrq and
l3. Ty;>cl crrorsis thc pnrbabilityof a failcd firm misclassifirdas an unfailcd
rypellcrmristhcprobabilityofanunfailcdlimmisclassificdasafailcdfinn-canbe
j"nn"a ,r thc misclassificationofthc failcd firm into thc unfailcd firrn and tlpc ll errorscan
of thc unfailcd fimr into tht fiilcd tintt'
tr dcfinrt.rs tlr rnisclassification
lnvstigarion oJ' Financia! Distrtssfor Thai f.inn-s l2l

estimatedstock retums calculatedfrom the estinratedchansesin

macroeconomic variables and firms' scnsitivitiesto rhoselrro.ro
variables as proxies of macro-relatedfacton, while the second
specification (thedirecttest)usesfirms' sensitivities to macrovariables
asproxiesfor macroeconomic factors.Thecontributionof themodelis
to bridge a firm's sensitivityto nucroeconomicconditionsand its
financialcharacteristics in order to investigatethe firm's financial
disftess.
The results are promising and confirm that macroeconomic
conditionsare importanf fncton in deteminatga fi,n's po-rdfl)ity
of
fi 'ancial crises.Theestimatedstockreturnvariableshorvssi gnifi cance
in_theindirect-testspecification(equationl) ard thc sens'itivity-to-
inJlationvariableis alsosigniiicantat the.0l levelin the direci+esr
specification (equation2). since r9g(*r9g7,theThaieconomyshowcd
signsof a steepdeclinecausingnegativerenrnrsfor equityinvestors.
1'heempiricalfindingsdemonstrate that, in an ecorromic crisis,the
higheror lessnegativea firm's return,the lowcr theprobabilityof the
firm's financialdistress.Inflationis thenrostcrucialvariablebccausc
the highera finn's sensitivityto i'flarion,the moreiikeiy the {inn's
oxposurc to financialdistrcss.
I-ortestingthepredicrive abiliryofthenrodel, (hecrrr-
tlresturll,rrsr:s
ofr point at .l to separatefinancially distressecl firrris fmrn non-
distressed firmsl.".cause to.,,r,pe
tlpe i erron{i':ir quitr r:ort1;.rr:iatir.'r,: ij
enoru.Forbothspecificaticns, thepr,xiictii,eabilityor acsut?cvranq':s
berween 60-80%of thcsample.An out-sanple testofpreriictirrabiiiry
confirms that the rnodelhas an accuracyof over 7v/o of the hol<ior.rt
sample.
In conclusioqthc articledeveiopstheinvestigation rnodel usingthe
1997 Thailand financial crisis. The mo<ielincoporaresrhe firms'
scnsitivitytomacrocconomic variablesandtheirfinancialcharacteristic.
It will be u-seful
in providingwamingsignalsof upcomingcrisessorhar
policy nrakerscan seekprotectivemeasurein orderto immunizethe
cconomyand protectagainstcontagiouqpotentiallylethal financial
diseases.

Refcrcnces

Alba,P.;Clacsse
ns,S.;andDjankov,S. 1998.Thailand,s
Corporarcfinancing
andgovernanccstnrctures:
irnpacton hrms'comlrctitivcncss.
confercnce