The Effect of Operating Cash Flow on the Likelihood and Duration of Survival for Marginally Distressed Firms in Taiwan

Abstract

The purpose of this study was to investigate the effect of operating cash flow (OCF) on the likelihood and the duration of distressed firms returning to a profitable position for survival. By selecting 309 marginally distressed firms that are Taiwan listed firms, we identified 218 firms that survived from financial distress and 91 firms that did not survive from financial distress for the logistic regression model. We found that the greater adequacy, stability, and growth of changes in OCF and the higher liquidity, growth, and size of firms significantly increased the likelihood of firm survival, suggesting that a distressed firm is more likely to return to profitability for survival if it can improve OCF after suddenly encountering financial distress. Moreover, applying duration analysis, this study took a further step to investigate the time dependence of firm survival among 218 surviving firms. The results suggest that firms generating more OCF in the post-distress period and possessing higher profitability, liquidity, and growth in the pre-distress period significantly took less time on resolving financial distress for survival. However, an economic recession can significantly impede the time and speed of firm survival. Overall, the study found consistent and robust evidence that OCF is a reliable instrument to predict the likelihood and duration of survival for financially distressed firms. The study also provides practical implications for managers, investors, policymakers, and lenders who intend to promote firm financial performance and sustainability.