Corporate Debt, Institutional Differences and Firms’ Financial Distress in Emerging Economies under Uncertainty

Tri Mulyaningsih, Tamat Sarmidi, Malik Cahyadin


Firms with high leverage are more vulnerable, particularly during uncertainty due to the COVID-19 pandemic. This study aims to examine the impact of leverage on firms’ financial distress by capturing two countries, Indonesia and Malaysia, which have different levels of leverage and financial development that affect access to external funding. The Altman Z-score—for a rich dataset comprising quarterly data of publicly traded companies between 2015 and 2020—is calculated to measure firms’ financial distress. Furthermore, the Difference-in-Differences (DiD) technique is employed to test the hypothesis that highly leveraged firms have a higher bankruptcy risk that leads to financial distress during the COVID-19 pandemic. This study finds that firms’ financial distress during the pandemic is higher than prior the pandemic. Indonesian firms’ financial distress was higher than Malaysian firms. Finally, highly leveraged firms are exposed to higher bankruptcy risk than firms with lower debt.


COVID-19 Pandemic; Highly Leveraged Firms; Financial Development; Financial Distress; Emerging Economies

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