LEVERAGE INDUCED FINANCIAL DISTRESS OF MANUFACTURING FIRMS IN BANGLADESH: A COMPARISON BETWEEN LISTED MNCS AND DOMESTIC FIRMS BY APPLYING ALTMAN’S Z SCORE MODEL

Abstract

Financial distress arises from excessive debt capital. The purpose of the study was to determine Altman's Z score and analyze as well as compare the effect of debt on Z scores of listed MNCs & domestic companies of Bangladesh over 24 years (1996-2019). The study was based on secondary data. Seven local companies and seven MNCs were selected as a sample from six manufacturing industrial sectors. It was found that on average one local firm was in the grey zone and the rest 13 firms were in the safe zone (Z scores>2.99). MNCs’ Z scores were significantly higher than that of domestic companies. The grand mean of the Z score of MNCs was 5.398 while that of domestic companies was 4.155. In the case of domestic companies, Z score changes by 0.01 or 0.24% for a 1% change of total debt in opposite direction. MNCs’ Z score decreases by 0.005 or 0.073% for a 1% increase of total debt. Domestic companies should increase Z score by redesigning the capital structure and improving basic earning power. The study has practical implications for corporate managers, policymakers, investors, and government because future strategy, policy, and business performance depend on the zone in which the firms are situated. JEL Classification Codes: G30, G32, G39.