The 1 Percent: Vietnam’s Elite Investors Reap Rewards as Market Risk and Financial Distress Take Toll on Listed Firms
A Study Reveals the Impact of Market Risk and Financial Distress on Vietnamese Listed Firms
A recent study has shed light on the stark contrast between the top 1 percent of investors in Vietnam’s stock market and the majority of listed firms, which are struggling to stay afloat amidst market risk and financial distress.
Market Risk and Financial Distress: A Devastating Combination
According to the study, which analyzed data from 2012 to 2021, high levels of market risk reduce firm performance, while high interest coverage ratios (ICRs) - a measure of financial distress - improve firm performance. However, when combined, these factors can have devastating consequences for listed firms.
- High ICRs can actually magnify the negative effects of market risk on firm performance, leading to reduced profitability and increased volatility.
- Market risk and financial distress can lead to reduced investor confidence, making it even more challenging for listed firms to raise capital.
An Optimal Interest Coverage Ratio Range
The study also found that there is an optimal ICR range for listed firms in Vietnam - between 112 and 134. Beyond this range, further increases in ICR can lead to decreased firm performance. This suggests that firms may be better off maintaining a moderate level of financial leverage rather than over-leveraging themselves.
Implications for Investors, Policymakers, and Business Leaders
The findings have significant implications for investors, policymakers, and business leaders in Vietnam:
- Investors: Consider the impact of market risk and financial distress on your investment decisions.
- Policymakers: Prioritize creating a stable business environment and implementing policies that support the development of the financial market.
- Business Leaders: Focus on raising ICRs by increasing earnings before interest and taxes (EBIT) or reducing debt levels. Firms with low ICRs should prioritize improving their financial health to avoid financial distress.
Recommendations for Listed Firms
For listed firms, the study recommends:
- Executives should focus on raising ICRs by increasing EBIT or reducing debt levels.
- Firms with low ICRs should prioritize improving their financial health to avoid financial distress.
Creating a More Stable and Sustainable Environment
As Vietnam’s economy continues to grow, it is essential that policymakers, investors, and business leaders work together to create a more stable and sustainable environment for listed firms to thrive in. By understanding the impact of market risk and financial distress, we can take steps towards building a stronger and more resilient economy.