Turnaround Prediction of Distressed Companies: Evidence from Malaysia

Abstract

The purpose of this paper is to investigate the applicability of developed country turnaround predication models as well as an “in country” developed turnaround prediction model for a sample of financially distressed Malaysian companies over the period of 2000-2007.

Multiple Discriminant Analysis (MDA) technique was used to determine companies’ financial health. It was found that severity of financial distress, profitability, liquidity and size are significant predictor variables in determining turnaround potential of distressed companies in Malaysia. The findings show that developed country turnaround predication models have relatively better prediction accuracies compared to turnaround model based on Malaysian firm-level data. These models’ prediction accuracies were gauged by comparing their predicated successful/failed turnaround companies (Type I and II errors) with actual classification of successful/failed turnaround companies by the Bursa Malaysia, and it was found that developed country models were better than model developed using Malaysian data in identifying correctly some of the actual successful turnaround companies. The paper’s comparisons show that Bursa’s methodology is appropriate in classifying and monitoring the distressed companies. This is believed to be the first paper to examine turnaround of the companies in Malaysian context.

Keywords: financial distress, turnaround, financial ratios, Malaysia

JEL Classification: G00