Liquidity and financial distress
Liquidity is one of the causes of financial distress in airlines industry. According to Bernanke and Gertler, (1989); Kiyotaki and Moore, (1997) (as cited in Vitali, Battiston and Gallegati, 2011) Financial distress can originate from borrowers, due to the disproportion between the amount of credit obtained and the level of firms’ creditworthiness. These disproportion amount will effected liquidity of firm. In addition, it also can originate from banks. If the banks run out of liquidity and are forced to a premature liquidation of their assets because of their market value goes below their book value and they are led to insolvency. (Kashyap and Stein, 2000; Bougheas, 1999) Besides that, Benmelech and Bergman (2011) also showed that the spreads of tranches which is Bankrupt Buyers and Bankrupt Aircraft without a liquidity enhancement are more sensitive to bankruptcy shocks.
Macroeconomic variables also is another factor that can influence liquidity in firm. According to Zavgren (1983) as cited in Hill, Perry, and Andes (2011), “Raising interest rates, a recessionary environment, and the availability of credit” may affect a firm’s change in financial status. The higher interest rate may affect a firm’s ability to borrow fund for the future because of illiquidity capital in firm. This may cause the firm faced by financial distress. Besides that, Hill, Perry, and Andes (2011) stated liquidity, a measure of cash, is significant in identifying financially distressed firms, it is not significant for bankrupt firms.
Acharya, Bharath, and Srinivasan (2006) showed creditors recover less if the industry is in distress and non-defaulted firm in the industry are more illiquid. This interaction will effect of industry-level distress. According to Acharya, Bharath, and Srinivasan (2006) also, illiquidity in the market for real assets during industry distress implies that more bankrupt firms, including inefficient going concerns are likely to emerge as restructured firm than to be sold to alternative user or to be liquidated. Thus, liquidity can affect the firm faced by financial distress.
Therefore, based on the literature, this research hypothesizes:
H1: There is a negative relationship between the liquidity and financial distress.
Table 1: Summary of the literature review
Author(s) Year Countries Model/ Data Findings
Acharya, Bharath, & Srinivasan. (2007)
London Shleifer and
Vishny model To examines
how industry distress affects creditor recoveries using comprehensive data on defaults in the
United States (from 1982 to 1999 and spanning all industries).
Benmelech & Bergman
Regressions -Results on the interaction between the bankrupt buyers measure and the redeployability of tranche
-Reports the effect of bankrupt buyers on tranches with and without liquidity
- Analyzes the relation between bankrupt buyers and credit spreads for buy and sell transactions.
- the relation between bankrupt...