Financial distress and firm performance: Evidence from Vietnam

Abstract

How financial status impacts firms’ operations has long been a central question in management. This study examines that relationship in the context of Vietnam, an emerging market where financing constraints, debt structures, and macroeconomic conditions differ substantially from those in developed economies. For listed manufacturing and commercial firms, we first construct a financial distress prediction model employing multiple discriminant analysis, achieving correct classification rates of 71.5% for distressed firms and 96.3% for sound firms. We then investigate the link between financial distress and firm performance, and regression analyses consistently reveal that alleviated financial distress is significantly associated with improved firm performance, controlling for leverage, firm size, foreign exchange risk, price level, and economic growth. Further robustness is confirmed across alternative leverage decompositions, subsample tests separating distressed and sound firms, and for the Covid-19 period. While consistent with the literature, these emerging market findings are noteworthy for their geographical and sectoral uniqueness. Managerial and policy implications are also discussed. Copyright © 2026. Published by Elsevier Inc.