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Financial Risk Management Early-Warning Model for Chinese Enterprises

Author

Listed:
  • Haitong Wei

    (HongHao Data Intelligence Technology Co., Ltd., Beijing 102699, China
    Data Intelligence Branch, Enterprise Financial Management Association of China, Beijing 100195, China)

  • Xinghai Wang

    (Data Intelligence Branch, Enterprise Financial Management Association of China, Beijing 100195, China
    Big Data Application Research and Service Center, Modern Education Institute of China Academy of Management Sciences, Beijing 100036, China)

Abstract

As enterprises face increasing competitive pressures, financial crises can significantly impact on their capital operations, potentially leading to operational difficulties and, ultimately, market exclusion. Consequently, many enterprises have begun to utilize financial early-warning systems to guide and control risks. Currently, there is neither a universal nor comprehensive enterprise financial risk management model in China, nor a unified classification standard for enterprise financial risk management levels. This article takes financial data on A-share listed companies in 2020 as the data sample, including those with special treatment (represented by ST) or non-ST status. We establish an independent indicator system within the framework of profitability, solvency, operational capability, development potential, shareholders’ retained earnings, cash flow, and asset growth. The model is constructed employing the factor–logistic fusion algorithm. The factor part addresses the issue of collinearity among risk indicators, and the logistic part presents the results in probabilistic form, enhancing the interpretability of the model. The prediction accuracy of this model exceeds 89%. Finally, by applying the principles of interval estimation theory to statistical hypothesis testing, we categorize the risk levels into Grade A, representing significant risk; Grade B, representing moderate risk; Grade C, representing minor risk; and Grade D, representing no risk. This article aims to provide a comprehensive definition of a universal financial risk management early-warning model applicable to all enterprises in China.

Suggested Citation

  • Haitong Wei & Xinghai Wang, 2024. "Financial Risk Management Early-Warning Model for Chinese Enterprises," JRFM, MDPI, vol. 17(7), pages 1-28, June.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:7:p:255-:d:1419263
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    References listed on IDEAS

    as
    1. Varetto, Franco, 1998. "Genetic algorithms applications in the analysis of insolvency risk," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1421-1439, October.
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