Corporate Failure Prediction Models for Advanced Research in China: Identifying the Optimal Cut Off Point

Abstract

The rapid growth of the Chinese economy has resulted in Chinese listed companies entering numerous global supply chains, and thereby contributing to the globalization of economies. Accurately predicting corporate distress is a crucial concern for enterprises, managers, investors, creditors, and supervisors. In this study, data from the 2003-2013 (excluding 2008) was analyzed, and a logistic model was applied to analyze critical factors. We developed Special Treatment (ST) model to measure distress of companies listed in China. The results indicate that the optimal cut-off point (one, two, three and fourth quarters before a failure), and the debt ratios (one quarter before a failure) or unadjusted economic value added (two, three and fourth quarters before a failure) is superior in predicting corporate failure in China The results indicate that the optimal cut-off point for corporate failure prediction explained that most of the accuracy in the debt ratios (one quarter before a failure) and unadjusted economic value added (the models range from the two quarters to the fourth quarters before a failure).