Predicting corporate financial distress for New Zealand listed firms using intellectual capital indicators

Abstract

Predicting corporate financial distress has become an important topic, especially after the great financial crisis of 2008. Most of the previous studies on this topic have only focused on financial ratios to develop prediction models. The shift from physical resources to a knowledge-based economy has increased the importance of Intellectual Capital (IC) for the firms. This study uses IC indicators along with traditional financial ratios to develop a model which can be used to predict corporate financial distress. The study focused on 12 failed and 12 matching successful firms from the New Zealand stock exchange from 2001 to 2014. The results show that the overall accuracy has increased from 82% to 92% after including IC indicators as predictors. Four financial ratios namely sales to fixed assets, sales to current assets, current ratio and firm size have been found to be significant predictors. The results indicate that IC indicators can be included in corporate financial prediction models. The results are useful for the investors who can use this model, by including IC indicators, to assess the financial health of a firm before making investment related decisions.