Study On Business Distress Of Chinese Listed Companies From Non-financial View: Evaluation Model And Empirical Analysis

Since corporate business distress is frequently caused by diversified factors, an evaluation model with multi-factor indexes can not only offer better guidance in controlling and elimination of business risk, but also provide stakeholders a more helpful decision-making aid tool. Owing to earning manipulation, inefficiency of internal control system and time-lag of financial report disclosure, the authenticity and timeliness of financial information are limited. Non-financial factors may contain some important information related to corporate business distress. They can be regarded as essential and useful supplement for financial indexes. The application of multi-factor non-financial indexes is helpful for us to detect potential risk sources and find out the key discriminators for corporate business distress, as a result, improving the effect of evaluation model. However, the existing domestic literature dealing with the application of non-financial indexes to corporate failure evaluation is quite limited. Only a few researchers, from some aspects, investigate the effect of a single non-financial factor or some non-financial factors of a certain dimension on corporate failure. This paper develops a framework of evaluation on business distress of Chinese listed companies from the non-financial view, describes the dynamic path of Chinese listed companies'business distress risk, tests the explanatory and discriminating power of firm-specific factors, stock market factors and macro-economic factors in business distress evaluation, and structures a set of multi-factor indexes to evaluate Chinese listed companies'business distress. This study may effectively help the Chinese listed companies to comprehend accurately the corporate business distress status.Applying non-parametric survival analysis, this paper estimates the hazard curve and survival curve of Chinese listed companies'business distress and in this way describes the dynamic process of business distress risk over time. Furthermore, it compares survival curves of business distress risk among several main industries.Moreover, the paper develops evaluation models respectively assessing the effect of firm-specific factors, stock market factors and macro-economic factors on corporate business distress and implements empirical analyses. Firstly, from the non-financial view, we use Logistic analysis to develop evaluation model assessing the effect of firm-specific factors and test the ability of these factors in explaining and discriminating corporate business distress. The empirical results show that the large shareholders'ownership, the state ownership, the proportion of the independent directors, the managerial agency costs, violation of regulation and audit opinion are detrimental to companies'business distress. The correct classification test under the jackknife method shows that state ownership, the managerial agency costs and audit opinion are relatively good predictors. Furthermore, the paper tests the influence of state controlling right by subgrouping the sample into the state-controlled and the non-state-controlled companies. The results indicate that corporate governance attributes, including ownership structure, board composition and managerial agency costs, act differently on the business distress status between the two subsamples. Secondly, applying Cox proportional hazard model and Logistic discrete time hazard model, we develop evaluation model assessing the effect of stock market factors and test the explanatory and discriminating power of these factors on corporate business distress. The empirical results indicate the company's relative size of market value and its annual abnormal returns are negatively related to the risk of business distress. The company's stock turnover rate is positively associated with the risk of business distress. Beta of the company turns out to be unrelated with the corporate business distress. In comparison with the hazard model that only contains the financial variables, the hazard model with the adding of stock market factors shows much higher overall explanatory ability, but only a little higher discriminating performance. Thirdly, the paper applies Cox proportional hazard model and Logistic discrete time hazard model to develop evaluation model assessing the effect of the macro-economic factors and test the explanatory and discriminating power of these factors on corporate business distress. The results indicate a significantly negative correlation exists between interest rate and corporate business distress risk. The increase of CPI is positively related to the risk of business distress. The increase of GDP and stock price index has negative effect on corporate business distress risk. In comparison with the hazard model that only contains the financial variables, the hazard model with the adding of macro-economic factors shows much higher overall explanatory ability and some higher discriminating performance.Based on the above three analyses, the paper develops three multi-factor evaluation models from the non-financial view and exerts empirical analyses. Firstly, using paired sample, the paper applies Cox proportional hazard model and Logistic discrete time hazard model to set up an evaluation model on corporate business distress including time-varying variables of stock market factors and macro-economic factors. The empirical results show that in comparison with the hazard model that only contains the financial variables, the hazard model with the adding of stock market factors or macro-economic factors exhibits much higher overall explanatory ability. The correct classification test shows that as the appropriate cutoff area is selected, the hazard model with these two dimension factors exhibits a lower tyeâ… error rate although the typeâ…¡error rate and the overall discriminating performance do not change significantly. This indicates that the hazard model with the adding of stock market factors or macro-economic factors has a better discriminating performance. Secondly, taking the medicine manufacturing industry as an example, this paper using non-paired sample, integrating time-varying variables, applies Logistic discrete time hazard model to evaluate empirically the corporate business distress in a given industry. In the evaluation, we find that in order to achieve a high and appropriate correct classification rate, the cutoff should be selected by trading off tyeâ… error rate and the typeâ…¡error and efforts should be made to reduce the potential cost of two types of errors to the decision-maker. By comparing the distress company group and the healthy company group, we find among them, there exit significant difference in the dynamic behavior of survival rate and hazard rate. This video demonstrating method can not only be used as an aiding tool to discriminate business distress, but also be used to predict"the likely time to distress". Thirdly, this paper establishes a frame of multi-factor indexes by combining the financial variables with the variables of ownership structure, governance mechanism, audit opinion, diversification and stock market information and develops a cross-sectional evaluation model of corporate business distress by using factor analysis and Logistic analysis. The empirical results shows that the evaluation model with adding all the multi-factors presents much better discriminating performance than the one only containing financial factors, which indicates that the non-financial variables contain the important information related to business distress.