The Relationship between Financial Distress and the Business Cycle: An Empirical Study on the Egyptian Market.

Document Type : Original Article

Author

Business Administration Department, Faculty of Commerce, Tanta University, Tanta, Egypt

Abstract

 
The purpose of this research is to examine the bidirectional relationship between companies' financial distress and the business cycle in the Egyptian market, especially with the scarcity of research in this area. Based on a quarterly time series extended from the first quarter in 2002 to the fourth quarter in 2018, the researcher constructed an index of financial distress and used real GDP as a measure of the business cycle. The researcher employed a vector autoregressive (VAR) model, in addition to the impulse response function and variance decomposition methods to test the research hypotheses. The study reached a significant negative effect of financial distress on the business cycle, but it didn't support the effect in the opposite direction from the business cycle to financial distress. I.e., the study didn't support the bidirectional relationship between companies' financial distress and the business cycle in the Egyptian market. Granger causality and Wald tests confirmed this finding. Many parties can benefit from this finding to anticipate and prepare for business cycle fluctuations. The study recommended several future researches in that field.

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