Prediction of distress and identification of potential M&As targets in UK

Abstract

Purpose

The purpose of this paper is to identify financial characteristics that assess and predict corporate financial distress in publicly traded firms quoted in the London Stock Exchange.

Design/methodology/approach

The model incorporates three existing literatures as an alternative to bankruptcy. The model has two stages: the first stage discriminates financially healthy or distressed firms utilizing binary logit regression. The second stage makes use of the univariate analysis. Firms can be further categorized into four possible outcomes: financially healthy, potentially healthy targets and financially distressed and potentially distressed acquisition targets.

Findings

It was found that financial distress could be identified as early as three years prior to the event. Moreover, statistically significant differences were found between the four firm sample groups.

Research limitations/implications

The vast changing environment and the financial crisis highlight the need for future research on the world trade implications, as well as the individual macroeconomic variables of each country.

Originality/value

This is the first time a UK study makes use of this model in order to follow the hazard model's procedure based on recent financial data. Due to the scope of the analysis, a new version of the latter procedure is employed. A further innovation that makes the model unique is its ability to classify a firm into one of several a priori groupings according to the latter's individual characteristics. This overcomes the limitation of earlier studies that only considered two possible outcomes for firms.

Citation

Polemis, D. and Gounopoulos, D. (2012), "Prediction of distress and identification of potential M&As targets in UK", Managerial Finance, Vol. 38 No. 11, pp. 1085-1104. https://doi.org/10.1108/03074351211266801