The Study Of Financial Distress Prediction Model

Since 1960s, studies on corporate failure prediction have prevailed both in theU.S.A and in European countries, and some researches on this subject have beenconducted in our country in these years. Along with gradually depth of the economicsystem of turn and great development of capital market, the demand of studies oncorporate failure prediction is enhancing. Building up effective corporate failureprediction model is not just an academic problem, but also important factorinfluencing the healthy development of Chinese capital market.This paper focus on the listed company in manufactory industry and the purposeof this paper is to build up an effective corporate failure prediction model. The paperlet *ST as a measure to judge whether company is in financial distress, by this makeuse of 2003～2005's 74 corporations as sample and 1:1 matching for financial healthycorporations. After comparing the advantages and disadvantages of many kinds ofmodel, we decide to use logit method, one basing on traditional financial ratios andone contain cash flow related ratios. Then, we review the important literatureconsidering non-financial variables on financial distress from domestic and abroadpapers, and try to include macroeconomic variables in the model. We introduce thesensitivity of macroeconomic conditions to reflect the sensitivity of corporate tomacroeconomic condition change, and add this variable into the prediction model.The empirical results indicate that the models built up basing on cash flow ratiosand sensitivity of macroeconomic conditions do not increase the predicting accuracy,however, the explanation of model is higher.