Solvency Risk and Corporate Performance: A Case Study on European Retailers

This paper proposes a new approach toward understanding the financial performance dynamics in the EU retail sector (pre-pandemic); we focus on the connection between indebtedness and solvency risk and other areas of corporate performance (e.g., liquidity, assets efficiency, and profitability). Its c...

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Autores principales:	Alexandra Horobet, Stefania Cristina Curea, Alexandra Smedoiu Popoviciu, Cosmin-Alin Botoroga, Lucian Belascu, Dan Gabriel Dumitrescu
Formato:	article
Lenguaje:	EN
Publicado:	MDPI AG 2021
Materias:	solvency risk financial distress retail European Union random forest Risk in industry. Risk management HD61 Finance HG1-9999
Acceso en línea:	https://doaj.org/article/b6e5be6ecb8b45a9816d167894a60f6b
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id	oai:doaj.org-article:b6e5be6ecb8b45a9816d167894a60f6b
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spelling	oai:doaj.org-article:b6e5be6ecb8b45a9816d167894a60f6b2021-11-25T18:08:38ZSolvency Risk and Corporate Performance: A Case Study on European Retailers10.3390/jrfm141105361911-80741911-8066https://doaj.org/article/b6e5be6ecb8b45a9816d167894a60f6b2021-11-01T00:00:00Zhttps://www.mdpi.com/1911-8074/14/11/536https://doaj.org/toc/1911-8066https://doaj.org/toc/1911-8074This paper proposes a new approach toward understanding the financial performance dynamics in the EU retail sector (pre-pandemic); we focus on the connection between indebtedness and solvency risk and other areas of corporate performance (e.g., liquidity, assets efficiency, and profitability). Its contribution resides in identifying the drivers behind solvency risk in a sector that went through significant transformations in recent decades, as well as the links between the various areas of performance of retailers, and their impacts on solvency risk, using the machine-learning random forest methodology. The results indicate a declining trend for solvency risk of EU food retailers after the global financial crisis and up until the beginning of the pandemic, which may reflect their maturity on the market, but also an adjustment to legal changes in the EU, meant to equalize the tax advantages of debt versus equity financing. Solvency risk accompanied by liquidity risk is a mark of the retail sector, and our results indicate that the most critical trade that EU retailers face is between solvency risk and liquidity, but is fading over time. The volatility of liquidity levels is an important predictor of solvency risk; hence, sustaining a stable and good level of liquidity supports lower risks of financial distress, and may mitigate the shock impacts for EU retailers. A higher solvency risk was accompanied by increased efficiency of asset use, but reduced profitability levels, which led to higher returns available to shareholders for high solvency risk retailers. Overall, retailers should focus on operational performance evidenced by financial indicator levels than on the volatility of these indicators as predictors of solvency risk.Alexandra HorobetStefania Cristina CureaAlexandra Smedoiu PopoviciuCosmin-Alin BotorogaLucian BelascuDan Gabriel DumitrescuMDPI AGarticlesolvency riskfinancial distressretailEuropean Unionrandom forestRisk in industry. Risk managementHD61FinanceHG1-9999ENJournal of Risk and Financial Management, Vol 14, Iss 536, p 536 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	solvency risk financial distress retail European Union random forest Risk in industry. Risk management HD61 Finance HG1-9999
spellingShingle	solvency risk financial distress retail European Union random forest Risk in industry. Risk management HD61 Finance HG1-9999 Alexandra Horobet Stefania Cristina Curea Alexandra Smedoiu Popoviciu Cosmin-Alin Botoroga Lucian Belascu Dan Gabriel Dumitrescu Solvency Risk and Corporate Performance: A Case Study on European Retailers
description	This paper proposes a new approach toward understanding the financial performance dynamics in the EU retail sector (pre-pandemic); we focus on the connection between indebtedness and solvency risk and other areas of corporate performance (e.g., liquidity, assets efficiency, and profitability). Its contribution resides in identifying the drivers behind solvency risk in a sector that went through significant transformations in recent decades, as well as the links between the various areas of performance of retailers, and their impacts on solvency risk, using the machine-learning random forest methodology. The results indicate a declining trend for solvency risk of EU food retailers after the global financial crisis and up until the beginning of the pandemic, which may reflect their maturity on the market, but also an adjustment to legal changes in the EU, meant to equalize the tax advantages of debt versus equity financing. Solvency risk accompanied by liquidity risk is a mark of the retail sector, and our results indicate that the most critical trade that EU retailers face is between solvency risk and liquidity, but is fading over time. The volatility of liquidity levels is an important predictor of solvency risk; hence, sustaining a stable and good level of liquidity supports lower risks of financial distress, and may mitigate the shock impacts for EU retailers. A higher solvency risk was accompanied by increased efficiency of asset use, but reduced profitability levels, which led to higher returns available to shareholders for high solvency risk retailers. Overall, retailers should focus on operational performance evidenced by financial indicator levels than on the volatility of these indicators as predictors of solvency risk.
format	article
author	Alexandra Horobet Stefania Cristina Curea Alexandra Smedoiu Popoviciu Cosmin-Alin Botoroga Lucian Belascu Dan Gabriel Dumitrescu
author_facet	Alexandra Horobet Stefania Cristina Curea Alexandra Smedoiu Popoviciu Cosmin-Alin Botoroga Lucian Belascu Dan Gabriel Dumitrescu
author_sort	Alexandra Horobet
title	Solvency Risk and Corporate Performance: A Case Study on European Retailers
title_short	Solvency Risk and Corporate Performance: A Case Study on European Retailers
title_full	Solvency Risk and Corporate Performance: A Case Study on European Retailers
title_fullStr	Solvency Risk and Corporate Performance: A Case Study on European Retailers
title_full_unstemmed	Solvency Risk and Corporate Performance: A Case Study on European Retailers
title_sort	solvency risk and corporate performance: a case study on european retailers
publisher	MDPI AG
publishDate	2021
url	https://doaj.org/article/b6e5be6ecb8b45a9816d167894a60f6b
work_keys_str_mv	AT alexandrahorobet solvencyriskandcorporateperformanceacasestudyoneuropeanretailers AT stefaniacristinacurea solvencyriskandcorporateperformanceacasestudyoneuropeanretailers AT alexandrasmedoiupopoviciu solvencyriskandcorporateperformanceacasestudyoneuropeanretailers AT cosminalinbotoroga solvencyriskandcorporateperformanceacasestudyoneuropeanretailers AT lucianbelascu solvencyriskandcorporateperformanceacasestudyoneuropeanretailers AT dangabrieldumitrescu solvencyriskandcorporateperformanceacasestudyoneuropeanretailers
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Solvency Risk and Corporate Performance: A Case Study on European Retailers

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