The IUP Journal of Accounting Research and Audit Practices:
Estimating Financial Distress in Textile Sector: Implication of Z-Score

Article Details
Pub. Date : Jan, 2022
Product Name : The IUP Journal of Accounting Research and Audit Practices
Product Type : Article
Product Code : IJARAP30122
Author Name : Pooja Singh* and Anindita Chakraborty**
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 16



The Indian textile industry has experienced a downswing in exports, an upsurge in production costs, and low efficiency because of demonetization and Goods and Service Tax (GST) headwinds. The Covid-19 pandemic has further aggravated the situation. Though the government has taken various steps to support the sector, evaluating the financial position of a textile firm is still important as it depicts the true picture of the firm's financial status, i.e., distressed or not distressed. The sample consists of textile firms listed on the National Stock Exchange (NSE) during 2010-2020. This study predicts the financial situation of textile firms using the Altman Z-score and also the relationship between the Altman Z-score and the market value of firms in India's textile sector using panel regression model. The findings suggest that many of the firms are distressed and the Z-score significantly impacts their market value. Further, only retained earnings to the total assets is significantly associated with the market value of firms.


Corporate failure is rarely the result of a sudden shift in the economic environment. In fact, it is uncommon for enterprises with good profitability and strong balance sheets to declare bankruptcy due to a quick change in the economic climate. Firms entering into distress will face asset shortage or extended liability. So, till the time the auditor proclaims the firm to be in financial trouble, investors lose considerable investment, and hence the importance of financial distress models predicting financial trouble (Hall, 2002).

Corporate failure and financial distress are generally considered synonymous because both terms indicate the difficulty faced by firms in meeting their financial obligation on the due date. However, time is the major difference between the two terms. Financial distress precedes corporate failure and is a costly process and does not imply bankruptcy (Keasey et al., 2015). A firm after experiencing financial distress may recover or fail; if it fails, then