Abstract
M.Comm. (Financial Management)
The purpose of this study is to show the influence of corporate debt on financial distress particularly during and after an economic/financial crisis on South African companies. It is assumed that companies that are highly leveraged prior to a crisis will experience financial distress during as well as after the crisis and that they will go through a process of deleveraging sometime after the financial crisis.
The financial statements of 47 capital intensive companies that are traded on the main board of the JSE Limited are analysed for two crises that took place between 1994 and 2010. These crisis points coincide with the Asian crisis and the Dot.com bubble crash. The 2008 sub-prime crisis is excluded from the analyses due to the absence of post-crisis financial information for some of the companies sampled. The analysis examines the relationship between debt and financial distress and between debt and profitability before, during and after the crises. The evolution of debt levels before, during and after the crises is also examined.
The empirical findings of the study are a departure from international literature and experience that suggest that during times of economic prosperity companies become over-indebted due to expansion plans and therefore in most cases experience financial distress as they are unable to meet their obligations or meet these with great difficulty during and after the crisis.