SELECTION OF EARLY WARNING INDICATOR TO IDENTIFY DISTRESS IN THE CORPORATE SECTOR: CRISIS PREVENTION STRENGTHENING EFFORTS

Abstract

This study aims to develop an Early Warning Indicator (EWI) that can provide early signals in the presence of pressure on the financial condition of the corporate sector. Thus, efforts to prevent deeper deterioration can be anticipated earlier in order to maintain the stability of the financial system. In the first stage, based on the company’s financial reports, the probable indicators are grouped into four categories i.e. liquidity indicator, solvency indicator, profitability indicator, and activity indicator. The indicators, selected as EWI, are the indicators that can predict the occurrence of corporate distress events, in the Q1 of 2009, with the minimum statistical error. The results of the statistical evaluation showed that in terms of aggregate, the indicators of Debt to Equity Ratio (DER), Current Ratio (CR), Quick Ratio (QR), Debt to Asset Ratio (DAR), Solvability Ratio (SR), and Debt Service Ratio (DSR) signal within a year before a distress event occurs in the Q1 of 2009. Thus, these indicators can be considered as EWI in the presence of corporate financial distress.