Policy risk and financial distress of listed non-financial firms in Viet Nam

Abstract

This study examines the impact of policy risk on financial distress among listed non-financial firms (excluding real estate) in Viet Nam over the period 2016- 2024. Financial distress is measured using the Z’’-score and a binary variable identifying firms that fall into the lowest Z-score group each year. The model is estimated using a high-dimensional fixed effects approach, absorbing firm, industry, and year fixed effects, with standard errors clustered at the firm level to address heteroskedasticity and serial correlation. The results indicate that all dimensions of policy risk significantly reduce the Z’’-score and increase the probability of financial distress, implying that shocks to macroeconomic policy management may weaken firms’ financial health and heighten micro-level instability risks. This study contributes empirical evidence on the differentiated effects of monetary, fiscal, and trade policy risks on financial distress in an emerging market context. The simultaneous use of continuous and binary distress measures, together with multi-way fixed effects estimation, enhances the robustness and credibility of the findings. The results underscore the importance of policy stability and transparency in strengthening corporate financial resilience.