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appropriate model estimator. Therefore, for the subsequent section, the analysis and discussion on the
firm-specific determinants of indirect financial distress costs are based on the results of the RE model.

Table 4. Panel Specification tests
p-values of the tests
F-test BP-LM Hausman Technique

0.0000 0.0000 0.0600 Random Effect

Once the appropriate model was obtained (RE), various diagnostic tests were then performed to check
for the presence of severe multicollinearity, heteroskedasticity and serial correlation problems. As
presented in Table 5, the diagnostic checks on the baseline model (RE) indicated the presence of serial
correlation (p-value < 0.05) and heteroskedasticity problems (p-value < 0.05) problem. To rectify the
problem, following the suggestion by Hoechle (2007), a remedial procedure has been carried out
using the random effect GLS regression with cluster option.

Table 5. Diagnostic Tests for Static Model
P-values of the tests
VIF H SC Strategy
1.09 0.0000 0.0120 Random effects GLS regression model with
cluster option
Notes: (1) VIF: variance inflation factors, (2) H: heteroskedasticity & (3) SC: serial correlation

Considering the various diagnostic tests that have been conducted and the remedial procedure
undertaken, this paper may say that there is enough evidence to conclude that the examined statistical
test satisfies the key assumptions of linear regression. As shown in Table 6, the results of the
regression results suggest that the model fits the data well at the 1% level. The result of the regression
also suggests that leverage (debt-equity ratio), efficiency (fixed asset turnover and return on invested
capital) and firm size were found to have a significant relationship with the profitability of the firms.
The results also suggest that liquidity of the firms and firm size do not appear to be significantly
related to a firm’s profitability. In addition to that, return on invested capital seems to have the greatest
influence on the level of profitability, which is explained by the highest t-value of 16.02.

Table 6. Determinants of Profitability: Consumer Product and Services
roe
Quick Ratio -0.0045 (-0.89)
Current Ratio -0.0008 (-0.17)
Debt Equity Ratio -0.2241*** (-3.62)
Fixed Asset Turnover -0.0010** (-2.52)
Return on Invested Capital 1.0975*** (16.06)
Firm Size 0.0664*** (3.17)
Constant -0.3280*** (-2.63)
N 228.0000
r2_o 0.9109
p 0.0000
chi2 688.1942
Notes: t statistics in parentheses
* p < 0.1, ** p < 0.05, *** p < 0.01

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