Corporate Financial Distress Prediction – A Review Paper

Abstract

Financial Distress is the stage before bankruptcy. Financial distress is the late stage of
corporate decline where firm faces lack of liquidity. Financial distress prediction has been the
area of research of many researchers. There are various financial distress predictions models
have been researched so far. Therefore, this study is intended to review the literatures on
corporate financial distress prediction, factors influencing financial distress as well as
principles of financial management for avoiding financial distress situation. This paper
classified the literatures under the two broad categories namely “Financial Distress
Prediction” and “Principles of Financial Management to avoid financial distress situation”.
The findings of the literature review under this paper suggest that Altman Z-score model has
been widely used for predicting corporate financial distress. The findings also suggests that
some of the key principles to be kept in mind to avoid financial distress situation include
optimum level of debt in the financial structure of firms; continuous monitoring of certain key
financial ratios namely cash flow to total debt, the net income to total assets, total debt to total
assets; following good management practices; preventing bank asset quality deterioration and
monitoring of Non-Performing Assets (NPAs) of banks.