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Financial Distress Prediction in China

Author

Listed:
  • Jianguo Chen

    (Department of Finance, Banking and Property, Massey University, Private Bag 11-222, Palmerston North, New Zealand)

  • Ben R. Marshall

    (Department of Finance, Banking and Property, Massey University, Private Bag 11-222, Palmerston North, New Zealand)

  • Jenny Zhang

    (Bank of New Zealand Cards, Level 14, 80 Boulcott Street, Wellington, New Zealand)

  • Siva Ganesh

    (IIST (Statistics), Massey University, Private Bag 11-222, Palmerston North, New Zealand)

Abstract

We use four alternative prediction models to examine the usefulness of financial ratios in predicting business failure in China. China has unique legislation regarding business failure so it is an interesting laboratory for such a study. Earnings Before Interest and Tax to Total Assets (EBITTA), Earning Per Share (EPS), Total Debt to Total Assets (TDTA), Price to Book (PB), and the Current Ratio (CR), are shown to be significant predictors. Prediction accuracy achieves a range from 78% to 93%. Logit and Neural Network models are shown to be the optimal prediction models.

Suggested Citation

  • Jianguo Chen & Ben R. Marshall & Jenny Zhang & Siva Ganesh, 2006. "Financial Distress Prediction in China," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 317-336.
    • Handle: RePEc:wsi:rpbfmp:v:09:y:2006:i:02:n:s0219091506000744
    DOI: 10.1142/S0219091506000744
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    Citations

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    Cited by:

    1. Li, Chunyu & Lou, Chenxin & Luo, Dan & Xing, Kai, 2021. "Chinese corporate distress prediction using LASSO: The role of earnings management," International Review of Financial Analysis, Elsevier, vol. 76(C).
    2. Situm Mario, 2014. "Inability of Gearing-Ratio as Predictor for Early Warning Systems," Business Systems Research, Sciendo, vol. 5(2), pages 23-45, September.
    3. Agata Lozinskaia & Andreas Merikas & Anna Merika & Henry Penikas, 2017. "Determinants of the probability of default: the case of the internationally listed shipping corporations," Maritime Policy & Management, Taylor & Francis Journals, vol. 44(7), pages 837-858, October.
    4. Evangelos C. Charalambakis & Ian Garrett, 2016. "On the prediction of financial distress in developed and emerging markets: Does the choice of accounting and market information matter? A comparison of UK and Indian Firms," Review of Quantitative Finance and Accounting, Springer, vol. 47(1), pages 1-28, July.

    More about this item

    Keywords

    Financial insolvency; prediction; Chinese market; financial ratios; JEL Classification: G330; JEL Classification: G150;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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