Study On Financial Early-Warning Methods For Chinese Listed Companies

Competitive market economy leads to great development, while it also gives birth to risks and crises. Poor financial management will not only endanger a company's survival and development, but also bring huge loss to its investors and creditors. Therefore,it is of great significance to build an effective financial crisis warning system,for it will benefit its stakeholders and also work as a important factor in fostering a healthy captal market.Financial crisis,also known as financial plight,in the worst case,will lead to a bankruptcy.Since China's accession to the WTO,companies in China are increasingly giving more attention to this issue. However,foreign research on forecasting insolvency (or business failure) is far more mature than us.The notice promulgated by China Securities Regulatory Commission on the special treatment of stock of listed companies in abnormal situation signifies that China's understanding and research on financial crisis has entered a new stage.Financial warning is to inform company operators and its stakeholders in advance of the risks faced by the company through the analysis of its financial statements and related business information and the use of its timely financial data and corresponding data management methods.In addition, financial warning also analyses the reasons for financial crisis and hidden problems of financial operations to make preventive measures.Generally speaking,the analysis of financial warning comprises qualitative analysis and quantitative analysis.Qualitative analysis relies on people's subjective judgement and can be classified into standardized investigation, "four-stage symptoms " analysis, flow chart analysis, management scoring, and so on. Quantitative analysis, however, applying a mathematical model or mathematical statistics to process scientific data, is based on the past statistical information. It mainly includes one entry judgement model, multiple linear model, multiple logic model, probit regression Model, artificial neural network (ANN) model, and other methods.Financial warning methods can not simply rely on financial data, quantitative and indicator analysis but should fully consider non-financial data that affects the company's financial status when applying it.In other words, We should take into consideration both qualitative and quantitative information to get a complete picture of the company financial status. Therefore, the combination of qualitative analysis and quantitative analysis is a better solution to improve the accuracy of guarding against financial risks.No matter what method is used, it must be laid on the basis of a real fair financial information,because false financial information of a listed company affects the accuracy of analysis methods. Calculating factors or criteria varies from different industries, firms and economic environment in a certain period.All these factors should be considered to establish a relatively sound, efficient method of financial warning system.In this thesis, financial crisis warning system is used in the study of listed companies, of which with financial anomalies and be specially treated are defined as being in a financial crisis. However,in the narrow definition of continued losses of enterprises, losses for two consecutive years are looked as a finacial cirsis,regardless of a ST company or *ST company.The definition of financial crisis in this thesis,therefore,is more strict and scientific than previous ones. In this context, cash flow warning system based on'Z-score model', is introduced in the study of a new ST company's financial position.Z-score model,which was first studied by Altman(1968), is a multiple linear function.And Altman's final equation includes five determine variables and its accuracy of predicting bankruptcy in the previous year is up to 95%.Thus,it plays a very important role in the monitoring and early warning of a company's finacial position.But Z-score has its own limit,bucause there is a difference in its applying when it comes to Chinese enterprises;moreover Z-score does not include cash flow dynamics,the foundation of all economic activities. So in this paper ,a integrated financial warning system is made with the combination of a Z-score and a cash flow warning system. Through the analysis of corporate cash flow warning system, we found that the net cash surplus of ST companies and earning protection mutilples in the two years before entering ST are lower than the group average and it is consistent with the results from Z-score.Therefore, this can truly reflects a company's profitability and debt paying ability.Also it makes up for the "Z-Score" deficiencies.In closing , among the financial warning sysytems of China's listed companies , Z-score is effective , especially for companies with normal performances;however,it is not all suitable for China's listed companies due to the determination of critical value. According to China company's low Z-score value ,I re-define the Z-score threshold, and further improve the guiding role of Z-model in decision-making. I believe that in the use of "Z-score" warning financial model,we should not only pay attention to the specific value of the Z range, but also be concerned about the Z value in the years to analyze trends in asset position, combine with the cash flow warning system so that it can more accurately reflects the financial position of enterprises.