Impact of Financial distress on the Debt Service Coverage in Ethiopia: A Case of Manufacturing Firms

Abstract

It is not uncommon to see manufacturing firms struggling to turnaround from their financial distress.  Debt Service Coverage ratio is presumed to play a role in addressing this problem. With this in mind, the main objective of the study is to determine the relationship between financial distress and Debt service coverage of manufacturing firms in Ethiopia for the period from 1999 to 2005. 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 liquidity, profitability, and efficiency have positive and significant influence on debt service coverage.  On contrary, leverage has negative and significant influence on Debt Service coverage. FD have a negative impact on DSC and leading firms to bankruptcy and liquidation and can cause economic, social and political impact on manufacturing firms and contribute to the CEO resignation, employee’s layoff or loss of jobs, dividend reduction, plant closing and related consequential health and moral distress.

Keywords: Financial Distress, Debt Service Coverage, Ethiopia