In order to analyse the context and data of this research, the perspective of capital market theory can be considered for investigating the risk of distress, its key attributes and nature. This particular theoretical perspective will be considered as the review of literature related to financial distress and distressed organization is incomplete and extremely fragmented. The theory of capital is built on the portfolio model of Markowitz with the underlying assumption that each and every investor is an efficient investment. Investors tend to be following the idea of Markowitz related to efficient frontier and there is choice for making investment in portfolios in alignment with the frontier.
This particular theory helps in explaining and predicting the progress made by capital markets and at times financial markets with time. The theory of capital market can be considered as a generic terms for analysing the securities. With respect to the trade- off between the returns adjusted in terms of investors and the involvement of inherent risks, this theory seeks on pricing assets such as shares most commonly.
Bonds, equities, mortgages and other investments are involved in trade across the market of capital. The instruments of finance within this particular market are known to be having long periods of maturity. The theory of capital tends to be stating that options and futures, Euro- currency deposits and loans, agreements of repurchase, negotiable certificates related to deposits, commercial papers, treasury bills, federal agency securities, and federal funds are merchandized within the market of capital. The variability and uncertainty of returns over the possibilities of losses and assets are termed as risks.