Corporate financial distress diagnosis model and application in credit rating for listing firms in China

doi:10.1007/s11704-010-0505-5

Front Comput Sci Chin

2010, Vol. 4

Issue (2) : 220-236 https://doi.org/10.1007/s11704-010-0505-5

research-article

Corporate financial distress diagnosis model and application in credit rating for listing firms in China

Ling ZHANG¹(

), Edward I.ALTMAN², Jerome YEN³

1. College of Business Administration of Hunan University, China; 2. Salomon center, New York University, USA; 3. Hong Kong University of Science and Technology, Hong Kong, China

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Abstract

With the enforcement of the removal system for distressed firms and the new Bankruptcy Law in China’s securities market in June 2007, the development of the bankruptcy process for firms in China is expected to create a huge impact. Therefore, identification of potential corporate distress and offering early warnings to investors, analysts, and regulators has become important. There are very distinct differences, in accounting procedures and quality of financial documents, between firms in China and those in the western world. Therefore, it may not be practical to directly apply those models or methodologies developed elsewhere to support identification of such potential distressed situations. Moreover, localized models are commonly superior to ones imported from other environments.

Based on the Z-score, we have developed a model called Z_China score to support identification of potential distress firms in China. Our four-variable model is similar to the Z”-score four-variable version, Emerging Market Scoring Model, developed in 1995. We found that our model was robust with a high accuracy. Our model has forecasting range of up to three years with 80 percent accuracy for those firms categorized as special treatment (ST); ST indicates that they are problematic firms. Applications of our model to determine a Chinese firm’s Credit Rating Equivalent are also demonstrated.

Keywords financial distress discriminant analysis credit rating. listing firms

Corresponding Author(s): ZHANG Ling,Email:jenyling@163.com

Issue Date: 05 June 2010

Cite this article:

Ling ZHANG,Edward I.ALTMAN,Jerome YEN. Corporate financial distress diagnosis model and application in credit rating for listing firms in China[J]. Front Comput Sci Chin, 2010, 4(2): 220-236.

URL:

https://academic.hep.com.cn/fcs/EN/10.1007/s11704-010-0505-5
https://academic.hep.com.cn/fcs/EN/Y2010/V4/I2/220

Tab.1 Financial ratio

Fig.1 Distribution of scores-original samples. Std. Dev=1.91, Mean=0.00, =60.00

Tab.2 Statistic description of discriminant function (Found in table:F = 12)

Tab.3 Statistical test of multicollinearity

Tab.4 -score distribution statistics

Tab.5 Prediction results of the distress model five years prior to ST announcement (original sample)

Tab.6 Mean and standard deviation statistics of financial indicators of two group companies three year prior to ST announcement. Numbers in the brackets are standard deviations

Tab.7 Financial distress diagnosis model comparison for Chinese firms

Tab.8 Credit rating of listed companies in 1998

Fig.2 Credit level of Listed companies in 1998

Tab.9 Credit rating of listed companies from 1998 to 2002

Fig.3 Variance of listed companies credit level from 1998 to 2002

Tab.10 Credit rating of Chinese listed companies from 2003 to 2008

Tab.11 Credit ratings of companies with ST announcement in 2002 ( = 29)

Tab.12 Credit ratings of companies with ST announcement in 2006 ( = 37)

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