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The role of intermediate financial distress events and business cycles in stock market delisting: evidence from the Johannesburg stock exchange

Leonard Makuvaza,Richard Chamboko,Sevias Guvuriro,Johan Coetzee

Published 2025 in Cogent Economics & Finance

ABSTRACT

Abstract Stock markets in emerging countries have experienced high rates of delisting despite their importance in enterprise development. Delisting is a well-studied phenomenon with numerous studies documenting its key drivers. However, these studies conceptualise delisting as a transition from a listed to a delisted state. Such an approach ignores the reality of a typical delisting process which is usually characterised by numerous distress episodes, before the final delisting (absorbing event). In this paper, we model the role of intermediate financial distress events and business cycles in stock market delisting using an extended Cox model. In addition to assessing financial distress events, the study also assesses the role of business cycles in explaining delisting. The current study, therefore, contributes to the literature on delisting by conceptualising delisting as a system-wide multistate framework, incorporating intermediate distress episodes. This approach sheds light on curative measures that can be employed by policymakers to resolve distress and reduce the rate of delisting on the stock exchange. Additionally, the study adopts models that appropriately handle time-dependent covariates such as business cycles, approaches that are not found in studies that commonly use binary approaches to understand delisting. We find the length of distress spells; consecutive income losses, and composite lead business cycle indicators as significant factors in explaining delisting. Intermediate distress events and business cycle indicators can therefore be used as early warning indicators for delisting and stress-testing variables in ascertaining the potential impact of changing economic conditions on delisting respectively. Impact Statement This study provides critical insights into the role of intermediate financial distress events and business cycles in stock market delisting. The study showed that the frequency of financial distress, length of distress spells and consecutive income losses as intermediate distress events and the lead business cycle indicator are significant factors explaining delisting. Practically, it implies that company managers can use distress variables, such as consecutive income losses and distress frequency, to trigger timely curative interventions and avoid costly business rescue mechanisms, such as judicial management. This study offers valuable guidance to company managers and policy makers on potential interventions that can be employed to avoid stock market delisting.

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