Impact of Financial Distress on the Efficiency of Selected Manufacturing Firms of Ethiopia

Abstract

Efficiency ratio has important implication on the solvency of manufacturing firms. Efficiency is how the firm uses its assets productively. Efficiency is measured in terms of income to asset ratio; it has great importance in addressing financial distress problem. With this in mind, the main objective of the study is to examine the relationship between efficiency and financial distress of manufacturing firms in Ethiopia for the period from 1999 to 2005. The researcher also explicitly reviewed the recent findings on efficiency-financial distress relationship up to 2015. Besides this the research examines various other factors affecting financial distress. Due to data heterogeneity, non-continuity and because the Hausman test favors it over the Random Effect technique, the panel data General Least Square  (GLS) regression method is used. The result proves that efficiency has positive and significant influence on debt service coverage.  Efficiency is the most important determinant for firms and firms should consider improving efficiency through retrenchment of obsolete and unproductive assets that decreases the capacity of generating return. Unproductive assets offset the profit generated by productive assets and decreases efficiency of firms.

Keywords: Financial Distress, efficiency, debt service coverage, productivity, Ethiopia