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Archives of Business Review – Vol. 8, No.11
Publication Date: November 25, 2020
DOI: 10.14738/abr.811.9311.
Liang, F. S., & Pathak, S. (2020). An Investigation Into The Linkage Between Malaysian Listed Manufacturing Companies' Business
Health And Financial Results. Archives of Business Research, 8(11). 157-164.
An Investigation Into The Linkage Between Malaysian Listed
Manufacturing Companies' Business Health And Financial Results
Foo See Liang
Associate Professor, School of Accountancy,
Singapore Management University, Singapore
Shaak Pathak
School of Accountancy,
Singapore Management University, Singapore
ABSTRACT
Malaysia is widely considered to be a key leading economy in the Asia
Pacific region. This research paper investigates the linkage between
the business (or financial) health, as measured by the Altman Z-Score,
and corporate performance, as measured by the Return on Equity
(ROE), of listed manufacturing companies in this market (the ‘BURSA’
or Bursa Malaysia Stock Exchange, formerly known as the KLSE or
Kuala Lumpur Stock Exchange). A linear regression has been conducted
between these variables to determine the magnitude and direction of
their relationships. The trends of Z-Scores over a five-year period have
also been analysed. The analysis covers the period from 2013 to 2017
(inclusive) and yields a statistically positive correlation between ROE
and the Z-Score for the market. Malaysia registered moderate-to- strong mean and median Z-Scores. These findings further support the
strong economic position of this market as an Asian giant.
Keywords: Financial Health, Corporate Performance, Manufacturing,
Altman Z-Score, Return On Equity, ROE, Malaysia, BURSA, KLSE.
INTRODUCTION
Introducing the Research Topic
The Asia Pacific region has experienced dramatic economic growth in recent years (IMF, 2017).
While growth is essential, the sustainability of organizations is also dependent on their financial
health. A notable economy that is riding these economic growth trends is Malaysia. This economy
is an important business hub in the Asia Pacific economic ecosystem.
The purpose of this paper is to examine the relationship between corporate financial health, as
measured by the Altman Z-Score (Altman, 1968), and corporate performance, as measured by the
Return on Equity (ROE), of listed manufacturing companies on the BURSA Malaysia Stock Exchange
based in Kuala Lumpur which is the capital and largest exchange in Malaysia. More specifically, we
seek to determine whether financial health is a determinant of corporate performance in this
market.
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URL: http://dx.doi.org/10.14738/abr.811.9311 158
Liang, F. S., & Pathak, S. (2020). An Investigation Into The Linkage Between Malaysian Listed Manufacturing Companies' Business Health And
Financial Results. Archives of Business Research, 8(11). 157-164.
Motivation & Contribution
Corporate performance is important but sound financial health is also needed to ensure
sustainability. The motivation of this study is to determine whether well performing companies
are financially healthy in this market. This study extends the work by Meric, Lents, Li and Meric
(2014) on the Asia Pacific markets by providing further understanding into the financial health, as
measured by the Z-Score, and corporate performance, as measured by ROE.
An important contribution is to provide empirical insights about this market in relation to its firms’
Z-Score and ROE over a period of five years, i.e. 2013 to 2017 (inclusive). This study also provides
an examination of the trends of Z-Scores over time (mean, median and standard deviation). We
believe this study would contribute to the further understanding of this market by key
stakeholders, such as investors.
With Asia’s growing economic importance, the study hopes to serve as catalyst for similar research
on other Asian economies. Additionally, a further motivation has been to extend and update the
authors’ previous works on this subject (Foo, 2015).
Literature Review
Corporate financial health has been widely studied upon countries in the Asia Pacific. These studies
include Hong Kong and Singapore (Foo, 2015), China (Wang and Campbell, 2010A and 2010B),
India (Pradhan, 2014), Sri Lanka (Gunathilaka, 2014), and Malaysia (Thai, Goh, Teh, Wong and Ong,
2014). The Altman Z-Score (Altman, 1968) was the preferred measure of financial health in these
studies.
Unlike the prior model by Beaver (Beaver, 1966) which examined financial ratios separately,
Edward I. Altman, created the Altman Z-Score (Altman, 1968) which combined a variety of
financial ratios into a single score that reflected the likelihood of a firm going into bankruptcy using
multiple discriminant analysis (MDA).
The model showed high predictive power on companies facing financial distress, as measured by
the Z-Score. The literature on statistical models for bankruptcy prediction is wide-ranging and
continues to expand. For example, E. I. Altman, in his lecture (Altman, 2007) quotes 12 new variants
of his models. Other studies on financial health that followed the Z-Score Model include Blum
(1974), Deakin (1977), Beynon and Peel (2001), Neophytou et al. (2001) and Chung et al. (2008).
Some researchers also used logit regression techniques (Ohlson, 1980), recursive partitioning
analysis (Frydman et al., 1985) and artificial neural network models (Trippi and Turban, 1996).
Nevertheless, Perez (2006) highlighted that MDA is still one of the most popular approaches used
for bankruptcy prediction (Agarwal and Taffler, 2007).
Furthermore, Aziz and Dar (2006) appraised 89 studies on prediction of bankruptcy between 1968
and 2003 and found that the multi-variable models, such as the Z-Score model, were the most
widely accepted. Additionally, a significant body of research (e.g. Altman and McGough, 1974;
Altman, 1982; Levitan and Knoblett, 1985; Koh and Killough, 1990) supports the reliability of the
Z-Score for the prediction of financial distress. Recently, Sherbo and Smith’s (2013) study
concluded that the Z-Score model has stood the test of time and is still highly applicable in today’s
business environment. In view of the above merits, this study adopts the Altman Z-Score as our