Modelling the recovery of distressed firms on the Johannesburg Stock Exchange: a Cox proportional hazard model approach

The Johannesburg Stock Exchange has been experiencing high levels of delisting over the past decade, drawing attention to the effectiveness of the mechanisms used to promote the recovery of financially distressed firms. This study analyses the factors that explain the recovery of financially distressed firms and estimates the firms’ time to recovery using a Cox proportional hazards model. Company annual financial statements curated by the IRESS database are used. The study contributes to the literature by illustrating the role of non-financial variables such as firm characteristics, distress events and business cycles in financial recovery. The median recovery time for financially distressed firms is about nine years suggesting a high risk of delisting. In addition, the study concludes that firm characteristics, distress variables, financial variables and business cycle indicators explain the recovery of distressed firms. Practically, distress variables can be used as early warning indicators of firms that are at risk of delisting thereby facilitating timely implementation of financial recovery mechanisms. The policy implication of the findings on business cycles is the need for the South Africa Reserve Bank to monitor economic expectations constantly and for policies that build confidence in the economy to enhance financial recovery on stock markets.