The Financial Distress Prediction Of China Public Listed Company

Financial distress prediction is an important research direction in the field of financial management. Whether a company is in financial distress is not only a deter-minant of a company itself to make strategic decisions, but also closely related to the interests of investors and creditors. Therefore the prediction of corporate financial dis-tress has a great significance.Most enterprises in financial distress always will be confronted with a gradual financial conditions deterioration from a good financial situation to financial distress or bankrupt. In general, the financial distress is not only premonitory, but also predict-able. Therefore, this paper attempts to construct a financial distress prediction model.This paper strives for a breakthrough in the simple classification of ST and Non-ST for financial positions, divides companies into three classifications:financial distress companies, financial instable companies and good financial companies. Data compose a sample of2007-2009(T-3) annual financial statements of177public listed companies in China. Degree of financial distress is expressed either by the binomial variable or by the trinomial ordered variable, accordingly, this paper construct a trinomial ordered logistic model and a binomial logistic model. Comparing the above two models, we find that the prediction accuracy of the former is higher than the latter. The misclassification of the trinomial ordered model mainly occurs between financial distress and financial instability. Besides, the trinomial logistic model is expected to measure the probability of default. If we know three classification’s historical default rates, we are able to compute the probability of default for any company.