Prediction Of Financial Distress For Chinese Listed Companies Considering Business Cycle

Prediction of financial distress has been a topic of concern for decades because it is very important to listed companies,stakeholders and even the economy of a country.The financial distress of a company usually means that the company’s operating cash flow cannot replace the company’s negative net assets.The deterioration of the financial condition of a listed company may affect the company’s operation and its employees.Therefore,it is very important to set up a financial early warning system to predict the financial distress of a listed company.This paper studies the phenomenon of financial distress for 142 Chinese companies that received the label ’special treatment’ from 2000 to 2015.We tested the data for multicollinearity and combined the Pearson correlation matrix with the P value between the factors to eliminate multicollinearity between the factors.This paper proposes Cox proportional hazard models of financial stress occurrences of Chinese listed companies through introducing financial factors,macroeconomic factors,the interaction terms of financial factors and macroeconomic factors and piecewise linear relationship for the macroeconomic factors and interaction terms to a Cox proportional hazard model one by one.The results show that the prediction accuracy with financial indicators is 81.86%.On the basis of financial factors,macro-economic factors,the interaction terms of financial factors and macroeconomic factors and macroeconomic factors based on piecewise linear relationship are added in turn.We find that the prediction accuracy is gradually improving.In this paper,ROC curve,Confusion Matrix and ks curve,are used to verify the accuracy of the four models.These three methods all verify that financial factors,macroeconomic factors,the interaction terms of financial factors and macroeconomic factors and piecewise linear relationship for the macroeconomic factors are added in sequence,the prediction accuracy,accuracy and discrimination are gradually improved.Our main contribution in this work is two-fold.First,we detect the heterogeneous influence of some of firm-idiosyncratic factors under different macroeconomic conditions on the probability of financial distress by introducing interaction terms to the models.Second,we introduce piecewise linear relationship for the macroeconomic factors and interaction terms.The introduction of piecewise linear relationship of macro factors reflects the cumulative influence of macro factors on financial distress in different periods.The introduction of the interaction of piecewise linearrelationship of macro factors and financial factors reflect the heterogeneous impact of financial factors on the financial distress of enterprises,especially when macro economy is declining,the cumulative impact of heterogeneity of enterprises will be stronger.This paper provides a more suitable method for financial distress prediction of listed companies in China.