A Review on the Determinants of Financial Distress

Abstract

The aim of this review is to explore the key internal and external determinants of financial distress in corporate finance, providing a comprehensive understanding of the factors that influence financial stability and distress in businesses. Financial distress is a significant concern for businesses, investors, and policymakers, affecting the overall health and sustainability of firms. Internal factors such as liquidity management, profitability, capital structure, management quality, asset structure, and growth potential are critical in shaping a company's financial decisions. External factors, including market conditions, macroeconomic variables, industry-specific pressures, legal frameworks, and international exposure, further impact the financial health of firms. The review synthesizes empirical evidence from case studies and scholarly articles to analyze the interplay between internal and external determinants of financial distress. It examines various theoretical frameworks and models used to assess financial instability in different industries and market conditions. The findings highlight the critical role of governance and liquidity management in preventing financial distress. Companies with strong governance practices and efficient liquidity management are better equipped to withstand financial challenges. The analysis also underscores the influence of external factors, such as market conditions and regulatory changes, on a firm's financial position. Future research should focus on developing dynamic, real-time models that incorporate both financial and non-financial indicators of financial distress. Additionally, cross-industry comparisons and long-term perspectives should be considered to better understand emerging risks such as technological disruption and climate change, which pose significant challenges to business sustainability.