Empirical Study Of China's Listed Companies' Financial Early Warning Based On Cash Flow

As the economic globalization develops, the market changes rapidly while uncertain factors come up greatly. It come increasing risks with more and more opportunities for enterprises. It may cause a significant loss or even bankruptcy for enterprises if enterprises cannot prevent and control risks effectively. Without any doubt, the financial risk is a very important factor of bankruptcy among many. Investors and other stakeholders could be subject to tremendous loss caused by financial risk. What's worse, an enterprise may be extinct because of financial risk. Financial Risk Forewarning aims to predict the operating and financial activities and discover the potential operating and financial risk during the business operating management through financial statements and relevant accounting information provided by enterprises. It warns the enterprise management level to take effective measures to prevent potential risks becoming losses in time so that to take precautions before it is too late.Most previous studies conducted modeling analysis by using the traditional model of financial indicators, rarely relating cash flow indicators. However, the importance of cash flow analysis has become common concern increasingly. In this paper, the author analyzes the limitations of traditional financial indicators and the advantages of cash flow indicators, which are found to be more effective than the traditional financial indicators on responding to the actual financial situation. The introduction of cash flow to cash flow-based forewarning models analysis of financial point of view is not only applicable in practical activities, but also in academic study. This paper discusses the financial forewarning system theory, theory of cash flow, financial forewarning function of cash flow and other specific thoughts to determine the scope of indicators to be selected within.Therefore, based on the principle of indicators selection, this paper establishes a financial risk forewarning system based on cash flow indicators. The author selects 10 indicators of cash flow, covering the solvency of enterprises, capacity of earning cash flow, financial flexibility, developing capacity. Through a discuss and study of a variety of existing research methods (single-variable model, multiple linear model, multiple discriminate model, multiple logistic regression model, multivariate probit regression model, nonparametric analysis, artificial neural network model, etc.), the author ultimately select the principal component analysis and Logistic regression analysis in the empirical and experimental stage.In the empirical and experimental stage, the author selects 390 A-share listed companies of China to study. Firstly, the author makes practical use of principal component analysis to select 5 principal components through sieving and dimensionality reducting. Then Logistic regression was constructed to build a financial risk forewarning model of listed companies in China based on cash flow. By analyzing and examining T-1, T-2, T-3-year financial data of 50 sample companies which are randomly selected, the model is proved to be right as expected. More importantly, as ST time progresses, the model's accuracy increases. The identification accuracy rate was 69.7%, 74.9%, 78.9%, which means the occurrence of financial risk is a gradual process, the closer ST goes, the greater the financial risk. In the end, the author proposes prospect of future research directions.