Investigating the Determinants of Financial Distress in Saudi Corporate Sectors

Abstract

The research aimed to analyze the determinants of financial distress in a cohort of 16 Saudi Arabian firms, covering the period from 2011 to 2022. A multiple linear regression analysis was employed in the study to investigate the association between financial distress and various firm-specific and macroeconomic factors. The empirical findings indicated that firm-specific factors such as gross profit, total assets, turnover ratio, solvency ratio, leverage ratio, and EA exhibit a statistically significant influence on the probability of encountering financial distress. Empirical evidence suggested that companies exhibiting higher gross profit and total assets tend to have a lower probability of experiencing financial distress. Conversely, firms with higher turnover, solvency, and leverage ratios are more prone to financial distress. Furthermore, companies exhibiting a higher rate of earnings growth (EA) tend to exhibit a decreased probability of encountering financial distress. Financial distress is not significantly impacted by GDP and inflation, which are both macroeconomic variables. Our findings indicate that the ESG score does not have a statistically significant effect on financial distress, which contradicts prior research. The implications of this study’s findings hold significant weight for policymakers, investors, and managers of firms in Saudi Arabia. The outcomes of this study can be utilized by policymakers to formulate effective policies that foster financial stability and avert financial turmoil. Similarly, investors and managers can leverage the insights to make well-informed judgments regarding their investment and operational tactics. In summary, our research enhances comprehension of the factors that lead to financial distress. Future studies should focus on finding out whether inflation has a significant effect on financial distress which our study failed to demonstrate.