Debt Overhang and Financial Distress: Predictive Power of Logit Model

Debt overhang is a vulnerable situation in which an organization owes more money than they can payback. This will hinder the growth of the company and leads to financial distress. According to RBI’s definition negative working capital, cash loss and negative networth are the factors influencing Financial Distresses. This research paper has attempted to device models for predicting probability of financial distresses among the PSUs working under the Chemical Sector in Kerala. In order to evaluate the ratios that can influence group status and quantify their connection, Multiple Logistic Regression analysis tool is administered. The results of this study put forward some forewarning of financial distress by establishing statistical relationships between account data of financially distressed and non-distressed stages. Financial ratios play a vital role in identifying the problems of financial distress.