A prediction of firms' financial distress using macro and micro variables: a case of Thailand

Abstract

The economic crisis in Thailand in 1997 is an exceptional case for academic studies. Internationally, it caused a contagion effect, spreading to other countries in Asia and other regions. Domestically. it caused a great deal of industrial and corporate bankruptcies. The Thai economy was relatively free from crises since 1934; the recent development in 1997, however, produced a sudden economic slump causing failures of many Thai corporations. Using a logit regression, this study develops a macro-related micro-crisis prediction model. The significance of the model is an attempt to bridge a firm's sensitivity to macroeconomic conditions and its financial characteristics in order to predict the firm's financial distress. The major finding indicates that macroeconomic conditions are important factors for the possibility of a firm having a financial crisis. The study also shows that the higher a firm's sensitivity to inflation, the higher the firm's exposure to financial distress. Finally, an out-sample test of prediction abil1ty confirms that the model has an accuracy of about 74% of the holdout sample.