An Empirical Study On Early-warning Of Financial Distress For Listed Real Estate Corporations In China

The real estate industry has been supervised under national macro-control policies for a certain period. Recently, an overall assessment of the whole industry is required to be performed as to determine whether these specific policies are required to be revised due to the constant changes in the industry environment. Thus the official real estate authorities should evaluate the risk thoroughly. Also, the participation of stakeholders of the real estate business are essential to prevent the company from falling into financial distress as well. Here the financial distress means an enterprise being incapable of making profit, and possibly being not able to proceed with decision making process neither, which can be the worst case. Fortunately, some certain indicators would appear fluctuant before an enterprise falling into financial distress, which provides monitors known as early-warning model for financial distress. This article aims to build and perform examinations and corrections on the logistic bivariate financial distress early-warning model by researching into historical research and theories related to the financial distress. Shanghai and Shenzhen A-share listed real estate companies are selected as industry representatives for data input.Based on historical researches, this article develops an early-warning financial distress model with higher accuracy. The results show that the indicators such as current ratio, sales net profit margin, the ratio of operating cash to income, revenue growth and the audit observation type are significantly helpful to detect financial distress two years in advance. Thesis of backward substitution in historical article without noticing the warning duration and non-matched data is discussed and eventually negated in this article. According to the predicted result, the industry is still maintaining its healthy status, although the risk level of the whole real estate industry is approaching to the historical highest point, similar to the year of2004and2007. Therefore, regulatory authorities could remain the tight control policy unchanged in a short term. There are some inadequacies in this paper, such as the oversimplification of the definition of the companies which are suffering financial distress; the lack of representativeness of the sample cases; oversimplification of judging critical values; inaccuracy of the statistical method from its own.