Corporate financial distress diagnosis model and application in credit rating for listing firms in China

Abstract

With the enforcement of the removal system for distressed firms and the new Bankruptcy Law in China's securities market in June 2007, the development of the bankruptcy process for firms in China is expected to create a huge impact. Therefore, identification of potential corporate distress and offering early warnings to investors, analysts, and regulators has become important. There are very distinct differences, in accounting procedures and quality of financial documents, between firms in China and those in the western world. Therefore, it may not be practical to directly apply those models or methodologies developed elsewhere to support identification of such potential distressed situations. Moreover, localized models are commonly superior to ones imported from other environments.Based on the Z-score, we have developed a model called Z China score to support identification of potential distress firms in China. Our four-variable model is similar to the Z-score four-variable version, Emerging Market Scoring Model, developed in 1995. We found that our model was robust with a high accuracy. Our model has forecasting range of up to three years with 80 percent accuracy for those firms categorized as special treatment (ST); ST indicates that they are problematic firms. Applications of our model to determine a Chinese firm's Credit Rating Equivalent are also demonstrated.

Environmental policy, environmental performance, and financial distress in China: Do top management team characteristics matter?

“…Therefore, a comparison with previous studies is not done. Overall, our results relating to the descriptive statistics are in line with those of the relevant previous studies (Lau et al, ; Marquis & Qian, ; McGuinness et al, ; Zhang et al, ).…”

“…It shows that the foreign exposure instead of increasing the EN_P' s ability to reduce the financial distress reduces the impact of environmental performance on financial distress. The findings can be associated with the much‐debated differences in the financial and corporate practices of Chinese and foreign markets (as cited in Altman et al, , Zhang et al, ). It can be argued that those TMT members who have gained foreign education or work experience in foreign countries might have applied the tacit knowledge of free foreign markets in Chinese controlled market without giving attention to the dynamics of Chinese market structure.…”

“…On average, the FD_SCORE for Chinese listed firms is 0.92 with the fifth percentile of 0.065 and 95th percentile of 2.094. It implies that majority of Chinese listed firms are in potential distress zone by the mean value and fifth percentile (see Table for the categorization of distress score according to Altman et al, ; Zhang et al, ). Regarding environmental performance ( EN_P ), the average value is 36.48 and the 95th percentile of 65.78 for a total of 3,171 observations.…”

“…First, such studies have been conducted in the developed markets by using financial distress measures (e.g., Almeida & Campello, ; Altman, ; Berger, Ofek, & Swary, ) specifically designed for those markets. However, findings of such studies are inconclusive and cannot be generalized to an emerging economy like China, due to the wide differences in the financial, accounting, and economic structures (as cited in Altman et al, ; Zhang, Altman, & Yen, ).…”

Forewarning Bankruptcy: An Indigenous Model for Pakistan

“…Therefore, any one of the two highly correlated ratios was dropped from further analysis. Following nine ratios were deleted from the analysis having correlation higher than ±0.8 following Zhang, Altman, and Yen (2010). After correlation analysis, remaining ratios (Table 3) were entered in the discriminant function using stepwise procedure in order to select best performing ratios.…”