The Determinants of Bankruptcy for Chinese Firms

Jinlan Ni · Wikil Kwak · Xiaoyan Cheng · Guan Gong

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Financial Distress and Bankruptcy Prediction Corporate Finance and Governance Corporate Insolvency and Governance

Abstract

The global financial crisis in 2008 increased the number of business failures in the U.S. as well as in China. The Chinese economy has also been affected by the recent global financial crisis given the fact that the Chinese economy depends heavily on international trade. Our study tries to find the determinants of bankruptcy in Chinese firms. Both logit and survival model analyses provide consistent results on the determinants in predicting distressed firms in China. Our results suggest that firms with liquidity problems and firms experiencing a decline in profits are more likely to file for bankruptcy. In addition, we find that, compared to state-owned enterprises (SOEs), collectively-owned enterprises, private-owned enterprises, and foreign-owned businesses are more likely to file for bankruptcy. This conclusion is robust after controlling for regional differences. The findings of this study show that the financial variables developed by Altman [Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(3), 589–609] and Ohlson [Financial ratios and probabilistic prediction of bankruptcy. Journal of Accounting Research, 18(1), 109–131] perform reasonably well in determining business failures of Chinese firms even though SOEs and shadow financing exist in China.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1980Financial Ratios and the Probabilistic Prediction of Bankruptcy 2001Forecasting Bankruptcy More Accurately: A Simple Hazard Model 2008In Search of Distress Risk 2006Multi-period corporate default prediction with stochastic covariates 2004Predicting corporate failure: empirical evidence for the UK 2002A genetic algorithm application in bankruptcy prediction modeling 2001Tests of the generalizability of Altman's bankruptcy prediction model

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