Impact of Financial Distress on the Firm’s Efficiency in India: Using Shareholder Activism and Profit Before Interest and Tax as a Moderator

Abstract

Purpose: This research attempted to reveal the impact of financial distress (FD) on the efficiency level of firms working in India. The objectives are as follows: (a) Obtaining the amount of consequence FD has on the efficiency of firms; (b) Assessing the effect of FD on the firms’ efficiency under the influence of technical efficiency. Design/Methodology/Approach: This article used the panel data method to analyse the data ranging from 2010 to 2019. Findings: The study’s results show a strong and positive relationship between FD and the operational efficiency of businesses operating in India. Additionally, in Shareholder Activism (SHA) most analytical models continually show a consistently positive and statistically significant. However, the Profit Before Interest and Tax (PBIT) impact remains statistically insignificant in all cases. Practical Implications: The implications of this research highlight an essential insight for potential investors, emphasizing the knowledge that FD have the potential to negatively impact a company’s market standing when they culminate in unfavorable circumstances, potentially leading to financial losses for invested capital. Originality/Value: As of now, there are no studies in the body of literature that support the moderating effects of two different variables—PBIT and SHA—on the relationship between FD and a firm’s operational efficiency.