What Causes Financial Distress? A Study of Inflation, Solvency, Profitability and Liquidity: A Random Effect Analysis

Abstract

The prevailing breakdown of PKR's purchasing power seems to have crippled the industry's ability to secure raw materials. The chemical industry in Pakistan continues to import approximately 68% of its raw materials. This can have a detrimental effect on finances, placing everyone in a bad financial situation. The aim of this study was to determine the effect of financial distress on liquidity (Cash Ratio), profitability (ROE), solvency (DAR), and inflation. This study focused on the chemical industry, which is in the PSX. The population includes all companies that listed in the PSX between 2015 and 2020. Following the sample selection point, up to five chemical companies in the subsector meet the sample requirements. This research makes use of both descriptive and multiple linear regression analysis with Random Effect Model approaches (REM). The results indicate that liquidity (Cash Ratio) has a significant positive effect on financial distress, while solvency (DAR) and inflation have a significant negative effect. Profitability has little impact on financial distress (ROE). The study's results assist financial policymakers in the chemical industry in stabilizing firms experiencing financial distress.