APPLICABILITY OF DEA-DA APPROACH IN ASSESSING FINANCIAL DISTRESS OF PUBLIC LISTED COMPANIES IN MALAYSIA

Abstract

Financial distress has long been a crucial topic in corporate finance due to its negative impact on a country’s economy. Numerous methods have been developed and proposed as early warning tools to assess financial distress. Therefore, this study aims to examine the applicability of Data Envelopment Analysis-Discriminant Analysis (DEA-DA) method in assessing financial distress of public listed companies in Malaysia. An equally balanced and matched sample of 100 companies listed in the Main Market of Bursa Malaysia was used in this study covering the period from 2014 to 2023. Three financial ratios, namely, working capital to total assets, retained earnings to total assets, and current asset turnover were used as the independent factors. The DEA-DA approach was carried out in two stages. The first stage classifies the companies into financially distressed and non-financially distressed groups and identifies companies that overlap between these two classifications. Then, the second stage was performed to segregate the overlap companies into one of the two groups. The results of this study show that, the DEA-DA approach could accurately classify 91% of the companies into the groups. The findings can assist managers, shareholders, financial institutions, auditors and investors in Malaysia to assess financial distress.