Does firm productivity influence default risk? Evidence from NSE-listed firms in high-default industries

Abstract

Purpose – This study explores the impact of firm productivity on the probability of default for the Indian high-defaulting industries for the period 2015–2024. Design/methodology/approach – The study uses the Cobb–Douglas productivity function (CD) to capture two measures of productivity: assets and employees. The default risk has been computed using Altman’s (2000) Z-score and Byström’s (2006) distance-to-default (DD) metrics. The relationship between productivity and default risk for the dataset comprising 251 companies has been examined using panel data regression analysis. Findings – The results indicate that asset productivity (ASS.PROD) positively drives firms’ financial health and contributes to mitigating their default risk, whereas employee productivity (E.PROD) does not impact firms’ likelihood of default. Practical implications – The managers and investors from an emerging market can benefit from the study’s findings. Managers must focus on improving firms’ asset productivity to mitigate the rising default risk of Indian high-defaulting industries. Investors should rely on productivity measures to assess default risk before evaluating and arriving at investment decisions. Originality/value – This is among the first few studies in India to apply both CD production functions and dual default risk measures across multiple high default industries to investigate the relationship between productivity and default risk. This study, therefore, fills the research gap from an Indian perspective.