Programa de Doutoramento em Gestão
Three Essays in Financial Distress
Sumaira Ashraf

Orientação:  Elisabete Gomes Santana Félix & Zélia Serrasqueiro

Large corporate failures and scandals in recent years indicate the shortcomings of current risk assessment tools and highlight the need for more extensive research on predicting financial distress (FD). The main objective of this thesis, comprised of three independent essays, is to provide empirical evidence on the factors affecting financial distress of firms. The first essay compares the accuracy of traditional distress prediction models at predicting the early warning signs of financial distress. The results reveal that the prediction accuracy of models declines for both early and more progressed financially distressed firms, when applied to an emerging market, Pakistan. The study results suggest that the researchers and practitioners should periodically revise the distress prediction models to adjust them with the dynamic changes in the business environment. The second essay for the first time investigates the benefit of combining accounting, market-based and financial reporting quality (FRQ) measures to predict financial distress of the developed and emerging market firms, UK and Pakistan, respectively. The resulting model shows good prediction accuracy for firms in the developed and emerging market, showing that the FRQ plays a significant role in the financial distress of firms. The findings of the study suggest that the researchers should use this hidden information of financial reports to predict financial distress of firms. The third essay explores the importance of board committee independence for firms operating in a developed market, the UK, and an emerging market, China. Our overall results support current best practice for corporate governance, which recommends more independent board members in compensation and nomination committees to ensure the unbiased selection and evaluation of corporate leadership. 

Keywords: Financial distress, financial reporting quality, panel data, corporate governance, board committee’s independence, conditional logit analysis