Default probability for the Jordanian Companies: A Test of Cash Flow Theory

Abstract This paper aims to investigate the effect of cash flow and free cash flow on corporate failure in the emergingmarket in particular Jordan using two samples; matched sample and a cross-sectional time-series (panel data)sample representative of 167 Jordanian companies in 1989-2003. LOGIT models are used to outline therelationship between firms’ financial health and the probability of default. Our results show that there is firm’sfree cash flow increases corporate failure. The result also shows that the firm’s cash flow decreases corporatefailure. Firms’ capital structures are fundamental in predicting default. Capital structure is seen as the mainfactor affecting the probability of default as it affects a firm’s ability to access external sources of funds.Jordanian firms depend on short-term debt for both short and long term financing. Keywords default, cash flow, captial structure, short-term debt Publication Details This article was originally published as Zeitun, R, Tian, G and Keen, K, Default probability for the JordanianCompanies: A Test of Cash Flow Theory, International Research Journal of Finance and Economics, 8,147-62, 2007.