Using Cash Flow Ratios To Predict Corporate Failure-an Emperical Research Based On Chinese Companies

As the globalization and expansion of stock market, the chances that companies fall into financial distress have increased. A failing firm could cause significant economic and social costs to its investors, creditors and auditors. Therefore, it is certainly of great significance to identify the likelihood of insolvency as early as possible.Financial early-warming has been a popular topic for researchers ever since Beaver’s successs. Most of current studies are based on various financial ratios. Cash has been increasingly important since traditional accrual-based information were found sometimes misleading and failed to warn investors of the dramatic changes in financial condition. However, there are few studies that have specialy examined the ability of cash flow information to predicting bankruptcy, most of which focused on the incremental power of cash flow information. Therefore, this study hoped to examine the predictive ablitiy of cash flow by building up a predictive model based on cash flow ratios.This thesis mainly used the empirical approach accompanied by theoretical approach. This thesis chose100ST companies and640non-ST companies as the sample, which is different from the match sample technique that almost all studies adopted. A ratio set including13cash flow ratios and3accrual-based ratios is designed to build a MDA Model on the basis of PCA as well as a Logistic Model. Then the ROC curve is applied to compare the power of MDA Model and Logistic Model.This thesis proceeds as follows. The first part will be the introduction which will explain the research background, literature review, research process and research method.The following part will be the theoretical analysis which first will give an definition of financial distresss. Then it will analyze the definition of financial early-warming, the characteristics, functions and the construction principles of financial early-warming system. After that, it will compare the cash flow ratios against accrual-based accounting ratios.The third part will be the methodology chapter which includes the sample design, the ratio set, an explanation of statistical models and the analytical techniques used in this study.The forth part will analyze the empirical results of this study, including the significance test of ratios, the construction of MDA Model and Logistic Model as well as the comparison between these two models using ROC curve.The last part will summarize the whole study by listing the main contributions and limitations of this study.