Determinants of Financial Distress in the Ethiopian Manufacturing Sector: the Case of Selected Food and Beverage Firms
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Date
2023-06-05
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A.A.U
Abstract
Financial distress is one of the most significant threats to many firms globally despite their size
and nature. The term financial distress is used to describe the financial situation of a firm
confronted with the arduousness that ensues in settling financial obligations on schedule, and to
the full extent. The main causes of corporate failure (financial distress) are the firms’ inability to
create value like inefficient use of the asset portfolio as a result of poor operational efficiency
firms increase their financial leverage and insufficient liquidity, the increment of firms fixed
costs, poor corporate governance measures, competition within the industry, technological
change, illiquidity of assets and revenue sensitivity to economic situations like recession. The
main objective of the study was to investigate empirically financial distress determinants in the
case of selected food and beverage manufacturing firms (large taxpayers) in Ethiopia. 11 firms
included in the sample that had at least twelve years annual report Document review was used
for collecting data from 2011 to 2022 annual reports. To achieve the stated objectives
quantitative approaches and explanatory research design was employed. The study used longterm debt to total equity and short-term debt to total equity as dependent variables of financial
distress measure, and firm age, efficiency, profitability, liquidity, firm size, solvency, firm
growth, GDP and Inflation as independent variables. For data analysis, the study used a panel
data model with its random effect estimates. The result of random effect regression revealed that
profitability, liquidity, solvency, and GDP have a negative and significant relationship with
financial distress. In contrast, efficiency has a positive and significant relationship with financial
distress. Firm size, firm age, firm growth, and inflation have a negative and insignificant
relationship with financial distress. Large tax payer’s food and beverage manufacturing
companies, corporate managers, investors, and lender are recommended to give attention for the
profitability, liquidity, solvability, efficiency, and the general economic condition via GDP than
the firm’s age, size, growth, and inflation is a wise decision before they make decisions. Finally,
it’s better for the Government to intervene and support their operation to make them financially
viable.