The impact of financial distress on financial development, risk, and growth of G7 countries

The aim of this study is to investigate the effects of financial distress in G-7 countries on financial development, financial risk, and growth rates. The study period is 2010-2024, and annual data were used. The independent variable of the study is the Financial Distress Index, derived using Principal Component Analysis (PCA), which is considered in the literature to be an indicator affecting countries financially. The dependent variables are the logarithmic form of the G-7 Countries' Most Traded Stock Market Index (representing financial development), CDS premiums, and Growth (GDP%) rates. As a method, the Westerlund cointegration test was applied to examine the long-term cointegrated relationship between the variables; and AMG and CCE coefficient estimators were used to determine the direction and coefficients of the relationship between the variables. A long-term cointegrated relationship was detected between the variables in all three models. According to the AMG and CCE coefficient estimators, financial distress has a negative impact on the financial markets of France, Germany, Japan, and the USA. For Germany, Italy, and Japan, it was found that financial distress had a direct impact on national financial risks. Finally, it was observed that financial distress did not affect the growth rates of these countries. These findings reveal that indicators sensitive to short-term fluctuations, such as the stock market and CDS, were affected by financial distress; however, the growth variable, which is expected to react in the medium and long term, did not show a significant reaction to financial distress.