Effect of Financial Distress on Operating Cash Flows
By stressing on the important function played by financial distress this document give new direction on the financial performance of joint stock firm. The main focus of this work is to identify a model which can be used for early predication of financial distress that permit us to identify a specific nature of financial distress can effect operating cash flow and which can lead the firm toward bankruptcy and to see the effect of financial distress on operating cash flows of companies listed on Karachi Stock Exchange. Financial distress is a situation when a firm’s assets’ value falls below some threshold. Firm starts to incur losses and it is not in a position to generate positive cash flows. A firm enters to financial distress before it goes bankrupt. We have studied 67 firms listed on Karachi Stock Exchange to see the effect on financial distress on their cash flows. My sample includes financially distressed as well as financially health firms. We have incorporated financial data of consecutive fmy years (2012 to 2016) of 67 firms. In order to measure the financial distress we have used Modified Altman Z-Score as a proxy. Other independent variables, which have been used, are size of the firm, Working Capital, Working capital productivity and Operating Profit. By regressing these Five variables (Financial Distress, Working Capital, Size of Firm, Working capital productivity and Operating Profit) on Operating Cash Flows we have found that financial distress contain negative consequence for company cash flows but Firm size, Operating Profit and Working capital productivity have positive effect on Corporate Cash Flows. Working Capital has a negative effect on operating cash flows. We have estimated my model with the help of regression analysis. My study is unique in a sense that there is a dearth of literature on financial distress with special reference to Pakistan.
Keywords - Altman Z-Score, Bankruptcy, Corporate Failure, Financial distress