A Financial Distress Early-warning Study

Since the birth of a corporation, it has to face the harsh competition and the integration of global economy makes this kind of competition even harder. Under the rule of"superior win and the inferior wash out", corporations are in the danger of failure all the time. The failure of the corporations will make great losses to the public wealth, therefore, the Chinese and foreign experts have paid much attention to research how to predict the failure of the corporations more precisely.The present studies mostly begin with the analysis of the reasons which cause the financial distress, and then establish the early warning models. However, few of them have demonstrated the exact definition of the financial distress. This dissertation reviews the definition of financial distress and puts forward a new opinion which emphasizes the conception of financial distress events. At the initial stage of the financial distress, the symptoms reflected in accounting numbers are not obvious. Financial distress events appear until the financial distress develops to some extent. Therefore, the prediction of financial distress is in fact the prediction of financial distress events.The present research mainly consider about five aspects to choose the early-warning indexes, including solvency, profitability, assets use efficiency, growth ability and financial structure. This dissertation analyzes the reasons which cause the financial distress events and supplements the indexes of assets quality and earnings quality. The author takes the corporations listed in Shenzhen and Shanghai Stock market as a sample and the time spans from 2001 to 2006. Through the descriptive statistics, we know that the companies which show up financial distress events have some common characteristics. Then through the T-test, the author has confirmed that the decline of assets quality is the important cause to make the corporations fall into financial distress events.