China's Listed Companies, Risk Of Business Failure Warning

Being a special cluster of Chinese companies and the foundation of the capital market, listed companies play a pivotal role in Chinese economy, as their performance determine the advancement of the capital market and finally affect the stability and development of the national economy indirectly. Recent years witnessed a downgrade in viability of the listed companies, fostering potential operational risk, and even corporation failure. The consequence of failure of listed companies is far more serious than that of unlisted companies, resulting in social and economic turmoil, and, at worst, economic crisis and social disorder. Therefore, a close attention is being paid by the government, financial industry, companies, academic and investors to predict and make early warning of failure of listed companies, so as to avoid the abuse of economic resources and serious social impact caused by failure of listed companies. This paper is the first attempt to conduct systemic research on listed company failure prediction and early warning, about which there are little research so far, to bridge the gap between the public concern and limited ad hoc research on partial analysis, and mainly related to financial analysis.This paper includes eight chapters. Chapter 1, as an introduction, was about the background, purpose and application of this research topic, and a brief description of the main content, structure of this research project, methodology and new findings from this research.With an objective to establish a theoretical system of business failure that has not been developed, Chapter 2 summarized the major previous researches, including bankruptcy model based on neo-classical capital structure, dependability model, business failure pathways, business generic failure types and made comments accordingly. Chapter 3 covered the classic techniques and methods of company failure, including UAM(Univariate Analysis Model), MDA (Multiple Discriminant Analysis), LM (Logistic Model), PM(Probit Model) and a comparison analysis of these methods with a discussion of the problems of these methods.In Chapter 4, a series of the technical methods and developments were examined, including Survival Analysis, ANN(Artificial Neural Network), CBR (case-based reasoning), CUSUM(Cumulative Sum), Rough Set Theory, FTA (Fault Tree Analysis), MDS(Multi-dimension Analysis), CA(CHAOS APPROACH), CT(Catastrophe theory). Due to the theoretical nature of the above chapters, Chapter 1 to 4 are regarded as the theoretical part of the paper.The following chapters are mainly for empirical research and application for Chinese listed companies. Chapter 5 mainly examined the overall situation of the Chinese listed company failure and structural problem of company failure, covering the definition of company failure in connection with Chinese listed companies, general situation of company failure in Chinese listed companies, with an emphasis on structural analysis of failure of Chinese listed companies, investigating company failure distribution by listing time, size, industry, geographical area, ratio, survival period, etc. In addition to the analysis of risk prediction and early warning of company failure in terms of key industry, geographical area, and size, most importantly, a post-listing survival period theory was concluded based on the survival period pattern founded by this research. This chapter is the key part of this research paper.Chapter 6 was mainly investigation about the reasons that caused failure of the listed companies and problems existing in company operation. The main reasons, revealed in this chapter, resulted in company failure covered incompleteness of institution, improper intervening, impact from industry change, macroeconomic factors, and internal company factors, such as corporate governance, core competence, main business weakness and multi-business strategy, capital structure, unregulated guarantee, unregulated usage of fund by major shareholders and related parties transactions, low level of creditworthiness and moral hazard of entrepreneurs.Chapter 7 was the core of this research paper, regarding prediction and early warning models and empirical analysis of Chinese listed companies. The early warning function and company failure prediction model graph were developed based on research about characteristics of Chinese listed companies and application of analysis models contributed by scholars in both China and western countries. Three prediction models were developed, based on different technical methods, including multi-factor determination early warning model(EW/MDA), logit regression early warning model(EW/Logit), Survival analysis early warning model(EW/PHM). These models are proved on empirical analysis and have application to both academic research and business operation.The last Chapter, Chapter 8 was about the application of the company failure prediction and early warning model. The scope of the application and the issues in the process of the application were extensively examined, followed by a recommendation about further research on prediction and early warning of company failure of Chinese listed companies.