Market risk, financial distress and firm performance in Vietnam

In 2021, when the Covid-19 pandemic had a severe impact on the economy, a significant number of enterprises in Vietnam temporarily suspended doing business. Previous studies have focused on either model for predicting bankruptcy and financial distress or measuring market risk during extreme events. The effects of market risk and financial distress on a firm's performance have largely been ignored in the literature, particularly in Vietnam. This study examines the effects of market risk, measured using the conditional value-at-risk technique and financial distress proxied by the interest coverage ratio (ICR) on firm performance for 500 nonfinancial listed firms in Vietnam from 2012 to 2021. We also estimate the optimal ICR for Vietnam's listed firms. Two estimation techniques are used: dynamic panel models (two-step difference-and system-generalized method of moments) and panel threshold regression. We find that increased market risk reduces firm performance. However, a higher ICR (lower financial distress) also improves a firm's performance. With increased market risk, the financial performance of firms with a high ICR deteriorates significantly.