Analysis of financial distress factors in the mining industry: Empirical study of the developing market

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Abstract

Bankruptcy and financial distress studies have been among the most intensively researched topics starting from the 1960s, being pioneered by Edward Altman, deploying accounting ratios for assessing the financial healthiness of companies. This research deploys financial, macroeconomic, and company-specific factors to check the movement of a company’s classification of financial health. Deploying a generalized ordered logit model on the sample of 11 mining companies listed on the Lima Stock Exchange (Bolsa de Valores de Lima — BVL) we revealed a significant impact of leverage, profitability, economic growth, company size and interest rates on the probability of company staying in or moving from one of three financial health groups. The study finds that borrowing costs significantly impact corporate financial distress, with Peruvian mining companies being naturally protected against adverse interest rate fluctuations reflecting their hedging ability. The findings of this research expand the current body of literature review and are consistent with results presented by Sierpińska (2021), Van et al. (2021), and Boďa and Úradníček (2016).

Keywords: Mining, Altman-Z, Financial Distress, Bankruptcy, Generalized Ordered Logit Regression, Corporate Bankruptcy, Early Bankruptcy Detection, Pro-Active Distress Detection, Financial Regulation, Corporate Finance and Governance

Authors’ individual contribution: Conceptualization — S.M. and L.A.S.; Methodology — S.M.; Software — S.M.; Validation — L.A.S.; Formal Analysis — S.M.; Investigation — S.M.; Resources — S.M.; Data Curation — S.M.; Writing — Original Draft — L.A.S.; Writing — Review & Editing — S.M. and L.A.S.; Visualization — S.M. and L.A.S.; Supervision — L.A.S.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, G33, O16

Received: 20.03.2024
Accepted: 24.01.2025
Published online: 28.01.2025

How to cite this paper: Movsesyan, S., & Seissian, L. A. (2025). Analysis of financial distress factors in the mining industry: Empirical study of the developing market. Journal of Governance & Regulation, 14(1), 218–229. https://doi.org/10.22495/jgrv14i1art20