Examining the Financial Distress Condition and Its Determinant Factors: A Study on Selected Insurance Companies in Ethiopia.

Abstract

The financial health status of business firms and the effect of firm characteristics on it are taught to be very important issues in the current business environment. This study empirically examines the financial distress condition and its firm specific determinant factors (Profitability, Liquidity, Efficiency, Leverage and firm size) in the Ethiopian insurance industry. The study is based on a ten year panel data ranging from 2007 to 2016 GC obtained from a sample of nine insurance companies. The study employed the Altman’s Z”-score model to test the financial health condition of the sampled insurance companies and the pooled OLS regression to determine the relationship between the explanatory variables and financial health condition. The result of Altman’s Z”-score analysis shows that the financial health condition of the insurers under study was not in a safe condition and it shows continuous fluctuations. On the other hand, the results obtained from the pooled OLS regression analysis shows that profitability and liquidity of insurers have statistically significant positive effect on their financial distress condition. Whereas leverage has a statistically significant negative effect on the financial distress condition of insurance companies. In contrast, efficiency and firm size have no statistically significant effect on the financial health condition of insurance companies.