Enlightening the Critical Factors affecting the Solvency of Indian Construction Industry: An Empirical Analysis using Multivariate Discriminant Analysis and Logistic Regression

Abstract

The present research work's purpose is to examine the vital factors that affect the solvency of the Indian construction sector. The two different parameters of solvency, namely debt to total assets (DTA) and cash flow to total liabilities (CFTL), are used in the present study. These two solvency indicators have been categorized using zero and one numerical values. One indicates financially sound companies, and zero indicates weak companies with poor solvency ratios. The different financial ratios, namely, profitability, liquidity, leverages, and turnovers, are used as predictors or explanatory variables of insolvency of Indian construction companies. The study employs multivariate discriminant analysis (MDA) and binary logistic regression to predict the factors accountable for the insolvency of the Indian construction sector. The empirical findings of MDA and logistic regression show significant discrimination in the solvency position of construction companies according to their different financial performance parameters, namely, profitability, liquidity, leverage, and management efficiency. Since there are two categories of companies as per their solvency position. So one discriminant function is created and found significant at 5% levels for two different solvency parameters. In the case of the first measure of solvency (DTA), turnover liquidity leverage ratios are the critical indicators for predicting the solvency of the Indian construction industry. Findings of MDA indicate that in the case of the second parameter of solvency (CFTL), profitability and management efficiency significantly discriminate between solvent and solvent companies. The logistic regression findings show that In the case of the first measure (DTA), leverage, liquidity, and management efficiency significantly distinct two sets of construction companies. In the case of the second measure of solvency (CFTL), profitability, management efficiency significantly discriminate solvency of two sets of companies. Overall the findings of MDA and logistic regression are consistent with each other. The outcomes of the study will be helpful to policymakers' different stakeholders. Society will also be benefitted by knowing the critical factors responsible for companies that are likely to become insolvent. Accordingly, the policymakers may issue financial assistance, subsidies, and advice to concerned companies.

Keywords

• Solvency, solvency ratios, profitability ratios, activity ratios, leverage, multiple discriminant analysis