Empirical Study Of Financial Distress Cause, Prediction And Countermeasure Of China's Listed Company

Capital market is an important part of market economy that is credit economy based on laws. With the quick development of China's capital market, public companies have become the most predominant group in our market economy and the source of capital market investment value. So they are not only the basis of stable capital market development but also the key to making full use of resources allocation by market to improve the quality of public companies. However, some public companies are plunged into financial distress due to various reasons, which has made their operating achievement decrease year after year. Even some public companies called"special treatment"companies because of abnormal financial position would be faced with the danger of withdrawal from the stock market. A company plunged into financial distress will lead to the loss of creditors as well as investors and probably affect the stability of our economy and society.It is essential for the existence and development of companies to keep going concern ability, which is also the basis to discern whether a company has been plunged into financial distress. So, the financial position of a company is an important sign to reveal its ability to keep going concern. What the financial position of a company reflects is the company's ability to keep going concern at real or potential financial risk. The going concern ability depends on the possibility to keep a company operating continuously. The company suffering from the worsened financial position will plunge into financial distress. But the financial distress is a gradual process including the sign, occurrence, development and so on. Although the existing literatures can accurately predict whether the public companies have plunged into financial distress, the prediction just means the beginning of the study on financial distress. In fact, further study on the development of financial distress is a continuation of the study. So many companies plunged into financial distress go out of the distress or worsen into the withdrawal from the stock market, so we need be concerned about the change of the companies plunged into financial distress.The study is to analyze the characteristic and causes during the course of financial distress, explore the factors that make companies plunged into financial distress and go out of financial distress, discover the existing problems in the development of a company and acquire the knowledge about the cycle change regularity. The study can be used to help parties at interest make use of the financial data of public companies before the financial distress take places, take effective measures to predict the financial distress of public companies, and take effective measures to keep away the potential financial risk so that the investors, creditor and other parties at interest can reduce the loss by avoiding or solving the potential financial distress. In addition, the findings of the study can be used by the supervisory authority as a theoretical and practical source of reference.It is a gradual process for a company to be plunged into financial distress, which can be discerned by efficient methods with its obvious characteristics. The financial position of a company plunged into financial distress will vary as time goes by. The way to deal with financial distress can be found out by studying the change. Based on some"special treatment"companies because of abnormal financial position from 2004 to 2006, the paper is meant to study the financial distress of public companies from theory to practice by empirical and standard methods. After giving the definition of financial distress, the paper deeply analyzes the characteristics and causes of financial distress about public companies based on the certain study samples and some theories. Although the factors resulting in the financial distress are various, the factors can be reduced to internal and external factors. The study is focused on the two internal factors that affect the financial distress public companies. After the paper analyzes the present situation, course and result of financial distress of public companies, the typical cases, and the performance of companies called off"special treatment"by employing the existing literatures, the multiple discriminate analysis model, logistic model to predict the financial distress, we put forward the methods to solve the financial distress. The paper studies financial distress and signs that appear before ,when and after financial distress, and form relatively complete system on the financial distress of public companies.The results show:1. The financial distress is a process which develops from financial stability to distress. The signs are obvious before it occurs and can be predicted. Meanwhile, the regularity of the development will be present after the financial distress occurs.2. The obvious financial and non-financial distress characteristics will appear before the financial distress occurs. Financial characteristics mean that there is a notable difference between the companies plunged into distress and the normal companies in items of the statements and financial criteria.3. The reasons, which make public companies plunged into financial distress, are extensive. But they can be reduced to internal and external reasons. Based on the existing literature, we propose the internal reason should be dominant. Financial and non-financial factors play a different role in the development of financial distress. The former is the direct factor and the latter is the deep factor to bring out the financial distress.4. The financial distress of public companies can be predicted. With the help of three years'financial criteria before financial distress, the initial variables are picked out by principal component analysis model. Besides, the prediction and comparison of financial distress are analyzed by making use of the multiple discriminate analysis model, logistic model, and the methods are both effective. The finding shows that financial criteria imply the useful information for the prediction of financial distress. Among the criteria, profitability and solvency can predict the distress better.5. The financial distress of public companies develops with great regularity., which usually walks into three ways: better financial position, no obvious improvement in financial position and worse financial position.6. Capital restructure is the main method to solve financial distress. We propose that the main method to struggle from the financial distress should be capital restructure by analyzing the current situation, the course and the result. Based on the existing literature, the main creativity and characteristic of the paper show as the following five aspects in the thoughts, the content and the methods:1. Present studies on financial distress are focused on either the causes of financial distress, the costs incurred from financial distress and the market reaction and prediction to the financial reports or one stage of the financial distress course. These studies seldom touch on the whole course, so a publicly accepted theory system of financial distress hasn't been formed so far. However, the paper studies the complete financial distress course and achieves a relatively complete study system about financial distress of public companies.2. Manage to build the theory structure of financial distress of public companies. the paper manages to build the theory structure of financial distress of public companies by studying financial distress and signs that appear before and after financial distress. It mainly analyzes the definition, the cause, characteristics and the prediction of financial distress before financial distress. Also, It contributes the study on the development financial distress after financial distress and the methods to solve.3. Theory analysis and practical cases are combined in the paper. The paper employs a great number of comparisons of financial statement items and analyses of typical cases, so the results can show the vertical comparison and the change of horizontal development more directly, clearly and actually. Above all, the results are very practical.4. Horizontal and vertical comparisons are adopted in the paper. Horizontal comparison is used between the normal companies and the companies plunged into financial companies, and vertical comparison is applied in the financial position of the companies plunged into financial distress. The horizontal comparison reveals the difference in the items of the financial statements, financial criteria and non-financial factors. The change regularity and the characteristic about the companies plunged into financial distress can be discovered by vertical comparison, which will benefit for the ways to solve financial distress.5. The samples selected span a long time, and the many variables are chosen in the paper, which highlights the paper. The vertical comparison of financial information spanning 6 years can better serve the deep systematic study on the trend of financial distress. What's more, 38 main financial statement items involving the three main financial statements, 19 financial criteria and 14 non-financial factors are made good use of in the paper, which not only reflects the complete systematic financial information and non-financial information and depicts the characteristic of the companies plunged into financial distress, but also discovers the measures to solve the financial distress, as well as the cause, characteristic, the regularity of public companies plunged into financial distress.