Assessing the Effect of Credit Risk on Egyptian Non-Financial Companies’ Financial Performance

Abstract

The purpose of this study is to investigate the impact of credit risk on financial performance in Egyptian non-financial firms between 2013 and 2022. This study used Altman’s Z-Score as an inverse measure of credit risk, return on assets and return on equity as measures of financial performance, in addition to using control variables leverage and liquidity. The study also aims to examine the indirect effect of operational efficiency as a mediator and the moderating effect of firm size on the relationship between credit risk and financial performance. The fixed effects regression model is used to analyse the panel data, 77 non-financial firms listed in EGX-100 were chosen as the subject of this study to investigate this relationship between 2013-2022 but based on the availability of data only 57 companies were used for a total of 570 observations. The findings revealed that Altman’s Z-Score had a positive and significant relationship with financial performance, while operational efficiency negatively and significantly affected financial performance, and liquidity had a positive and significant effect on financial performance. On the other hand, firm size was found to have an insignificant effect on the relationship between credit risk and financial performance. It is recommended that non-financial firms diversify their revenues to include different currencies to avoid currency crises or economic instability that may occur in Egypt. The results of this study were supported by the portfolio theory and the signaling theory.