Identification of Financial Distressed Firms at Pakistan Stock Exchange Through Infusion of Corporate Social Responsibility Information into Altman Z-Score

Financial distress is one of the leading reasons for corporate default, foreclosure, and subsequent bankruptcy. Traditionally accounting information-based models have been used to identify the financially distressed firms. Inaccurate identification results in type-I and type- II errors. These errors...

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Bibliographic Details
Published in:NUML international journal of business & management 2022-12, Vol.17 (2), p.1-10
Main Authors: Mumtaz, Khalid, Ammara Mujtaba, Aman, Nida
Format: Article
Language:English
Subjects:
Accounting
Bankruptcy
Business administration
Corporate Governance
CSR
Default
Financial distress
Financial statements
Foreclosure
Identification
New stock market listings
Securities markets
Social responsibility
Standard scores
Stock exchanges
Z Score
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Summary:Financial distress is one of the leading reasons for corporate default, foreclosure, and subsequent bankruptcy. Traditionally accounting information-based models have been used to identify the financially distressed firms. Inaccurate identification results in type-I and type- II errors. These errors are attributable to the elements of conservatism and prudence within the accounting information. Enclosure of market information into these models may reduce the quantum of errors and improve the existing ability of these models to accurately identify the financially distressed firms. This study has infused the Corporate Social Responsibility information into the Altman Z-Score. The enclosure has been made using additive index methodology, resulting in formation of a Composite Default Index. 161 non- financial firms listed on the Pakistan Stock Exchange have been taken as the sample over the study period of 2010-2016. The accuracy of Composite default Index has been found significantly better as compared to the Z-Score Default Index as the type-I and type-II errors are reduced by 41% and 132% respectively. This study has implication for the corporate regulators, practitioners, stakeholders and researchers in form of providing a better mechanism to identify the financially distressed firms, future studies may consider other forms of market information and the accounting information-based models to improve upon the same, further.
ISSN:2410-5392
2521-473X
DOI:10.52015/nijbm.v17i2.107