FINANCIAL DISTRESS DETECTION AT THE CONSTRUCTION SECTOR COMPANIES
DOI:
https://doi.org/10.15544/ssaf.2021.06Abstract
Financial distress detection at business companies is becoming the focus of an increasingly large number of researchers and practitioners with each year. The analysis of scientific research works has suggested the research problem, namely, the lack of a sufficiently reliable financial distress detection model, which could be used for early detection of financial distress for the companies to promptly undertake preventive procedures.
The logical scheme for the empirical study was developed based on previous research findings. It enabled the authors to design the financial distress detection model. The model variables were selected, the analysis of closenss of relationships between the independent variable and dependent variables was performed; correlation between the dependent variables was verified, and the problem of multicollinearity was solved. Following the selection of significant indicators (return on total assets, equity-to-debt ratio, and modified indebtedness), the logistic regression function was developed for calculation of the financial distress probability at the company. The model was verified on the basis of data of other companies with the bankruptcy detected within three years before the bankruptcy was declared.
To design the financial distress detection model, other companies with or without financial difficulties were selected. The research period was 2014-2018. The designed logistic regression model enables reliable calculation of the financial distress probability at the construction sector companies. The empirical verification of the applicability of the designed model to the constrution sector companies showed that the correct classification rate Ar of the model was 0,97, model sensitivity Se – 1, model specificity Sp – 0,94. The results of model assessment have reasonably suggested that the designed model enables reliable detection of financial distress at the construction sector companies. By using the designed model, the construction sector companies would be able to perform early detection of financial distress at the company and identify the necessity of implementation of the preventive procedures.
Keywords: financial distress, financial distress detection model, construction sector companies.
JEL codes: G32, G33, L74.
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