An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry

Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry
Li Jiming, Du Weiwei
Zhejiang University City College, Zhejiang University College of Economics, Hangzhou, China Email: lijm@zucc.edu.cn Zhejiang University College of Economics, Hangzhou, China Email: duweiweifay2005@yahoo.com.cn doi:10.4156/jdcta.vol5.issue6.44

Abstract
With the fast development of the capital market and the integration of the global economy, the complexity and uncertainty in the economic field is more and more prominent, and the number of the companies involved in the financial distress is increasing dramatically. In this decade China has become a large manufacturing country in the world, which made it increasingly urgent for Chinese companies to set up corporate financial distress prediction models to enhance the capability of risk management. Most research mainly focused on analyzing the difference in the financial indicators between companies involved in financial distress and non-financial distress, but paid less attention to the corporate non-financial indicators. This paper employs non-financial indicators in the financial distress prediction model to examine 50 manufacturing companies listed in Shenzhen and Shanghai stock market with ST during 2005 and 2007 by the method of the logistic model, in which two financial distress prediction models with financial indicators and the mixture of financial and non-financial indicators are set up. The result shows that the model with non-financial indicators can improve the ability of corporate financial distress prediction, and the timeliness and long-run validity of the mix model is much better than the model with only financial indicators, and the nearer to the company financial crisis occurrence, the better the validity.

Keywords: Financial Distress Prediction, Logistic Model, Non-financial Indicator,

Manufacturing Industry

1. INTRODUCTION
It is usually gradually revealed that companies enter into financial crisis after a worse process of the financial situation, so there exits a certain aura and predictability. There are many reasons for corporations involving in the financial crisis: mistakes in the management decision-making, lose of control in the management, the external environment change and so on. Therefore, the establishment of a scientific financial distress predication system in the normal operation of the financial system can track and monitor the companies financial situation. The timely and effective prediction on the corporate financial distress by establishing prediction models has been a hot topic in this field. Corporate financial distress prediction as an economical and effective diagnostic tool has both high academic and applicable value. By establishing a complete and scientific financial prediction system, the management can forecast the corporate operation situations according to the information provided by the financial distress prediction system; can adjust the strategic plans and managing strategies timely according to the problems revealed by the system; and the investors and creditors can make the right investment choice by dynamic analyzing on the financial forecasting indicators. Therefore, the financial distress prediction has very important practical significance.

2. LITERATURE REVIEW
The corporate financial distress prediction research has undergone for a long time. Most of the research adopts bankruptcy as a standard, and generally can be divided into two models: one based on pure financial indicators and the other mixed model based on financial and non-financial indicators.

- 368 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

The financial distress prediction which based on financial indicators dates from the 1930s. Fitzpatrick (1932) firstly studied a one variable bankruptcy prediction. He selected 19 companies as sample, and divided the sample into two groups called bankruptcy and non-bankruptcy according to a single financial ratio. Then he found that net profit/shareholders equity and shareholders equity/debt is indicators with highest capable of discriminating. But in the following 30 years, the relative literatures are still rare, and the study on the financial distress predication stalled. Until 60s, Beaver and Altman published significant papers respectively. Beaver (1966) examined 29 financial ratios ability of prediction in 1-5 years prior to the enterprise fell into bankruptcy and found that the precision of operating cash flow/total liabilities could reach to 87 percent in 1 year prior to bankruptcy. Altman (1968) introduced multiple linear discriminate projections into the financial distress prediction field. He marked the companies according to the multiple linear discriminate methods and set up Z score model. Then when he predicted the companies 1 year before bankruptcy, 95 percent of the results are correct. In the late of 20 century, in order to avoid the one-sidedness of the research, many scholars tried to introduce non-financial indicators into the financial distress prediction model. Marquette (1980) suggested introducing macro-economical indicators into the establish of model, such as interest rate, inflation rate, indicators of changes in economy and so on. Izan (1984) introduced the relative percentage of industry into the model and found that it had a great effect on telling the difference between financial distress companies and health companies. Donaldson (1986) thought that economic event had a certain lead time and that we can put some events such as whether bills to be paid on time, whether bank load to be paid on time and whether senior managers to sell the stocks into the model for researching. Elloum and Gueyie(2001) put some characteristics of the board into the model, for example the rate of outside directors in the board and whether the director and general manager is the same person. The result showed that except the financial indicators, the composition and structure of the companys board could explain the companys financial distress. The research on financial distress at home started from the end of this century and most of the research focuses on the ST companies of the listed companies, generally, it can be divided into two kinds: models based on pure financial indicators and the mixed models based on financial and nonfinancial indicators. The first person to research financial distress prediction by the financial indicators is Chen Jin (1999) who studied the model by adopting debt-asset ratio and liquidity ratio and the statistics of 27 ST companies and non-ST companies in 1998 in Accounting Research. Then, Zhang Ling (2000) selected 120 listed companies as the sample and set up the financial distress prediction model by picking 15 financial indicators according the ability to repay debt, the profitability and so on. Wu Shinong (2001) selected 140 listed companies during 1998 and 2000 as sample, and set up financial distress prediction models according to 3 different methods and 15 financial indicators. Then he found the logistic regression model is the best one. Zhang Houqi (2002) selected 37 financial indicators from the 3d issue report of Shanghai securities joint research plan to study. In the 21st century, scholars at home began to pay attention on establishing financial distress prediction model by adding non-financial indicators into the model. Jiang XiuhuRen Qiang (2002) used the multiple regression and introduced equity concentration, management ownership stock rate and general manager stock ownership rate into the research. Zhang Jian(2004)Chen Lianghua and Sun Jian(2005) studied the financial distress from the internal governance mechanisms and ownership structure. The study found that the proportion of independent directors and the ratio of the largest shareholder stocks have something with the financial distress. After studying the 125 listed industrial companies in China, Cao Defang (2006) found that the ownership structure had great effect on the financial distress. From the choice of indicators in the research, most of the research still focuses on analyzing the difference of financial variable between financial distress companies and non- financial distress companies, then establishing the financial distress prediction model without thinking about the nonfinancial indicators. In the research of introducing non-financial indicators into the models, most pays attention on adding unilateral non-financial indicators, rather than adding wide ranges of non-financial indictors. This paper introduced the non-financial indicators into the financial distress prediction system,

- 369 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

using 100 manufacturing listed companies of Shanghai and Shenzhen stock market during 2005 to 2007, and selected the pure financial indictors and the mix of financial and non-financial indictors as the variables, then establishing the financial distress prediction model adopting the logistic regression method.

3. HYPOTHESES
Theoretically, distress signs of non-financial indicators usually come before that of financial indictors, moreover, publishes of the financial report often lags after the fiscal year of the financial report. Therefore, from comparing the mix financial prediction model with non-financial indictors to the distress prediction model based on the financial indictors, the front is better than the latter. Non-financial indictors are not easy to manipulating, moreover, outlier and extreme value usually wont come out, but it is opposite to the financial indicators. Therefore, the stability of the mixed model is better than the prediction model which based on pure financial indictors. The theoretical hypotheses of this paper are following: H1: Adding non-financial indicators to the financial distress prediction model can improve the precision of the prediction; H2: The mixed model can predict the distress early than the financial indicator model.

4. METHODOLDGE
4.1. Sample and Data
In order to avoid the mutual influence and specificity in data of different industries, this paper selects 50 ST listed manufacturing companies of Shanghai and Shenzhen stock market during 2005 to 2007(including 4 war and space industries) as the sample. And, 12 companies are firstly ST in 2005, 13 ones are firstly ST in 2006 and the rest 25 ones are firstly ST in 2007. Furthermore, companies as follows are removed from the ST sample: (1) Pure B share companies; (2) Companies which are ST for other unusual reason; (3) Companies to be ST in two years after listed; (4) Companies with incompetent and irrational data. Comparing to the selection of ST companies, the non-ST companies (financial normal companies) are selected according to the ratio of 1 to 1. Keep to the following principles: same industry, the sample selected from the same or close industry, same fiscal year, and close asset scale. The happening of the financial distress of listed companies is a contiguous and dynamic procedure. So this paper defines the last year, the last two year and the last three year of the appearance of the financial crisis of listed companies as t-1 year, t-2 year, and t-3 year. And the data are selected from t-1 year, t-2 year and t-3 year, in order to predict from long running. The data of this paper come from the CCER and Wind database of Chinese Economy Research Center of Peking University.

4.2. Measurement
(1) Financial indicators According to Financial Management Theory, financial ratio indicators can combine assets and liabilities statement, income statement and cash flow statement; moreover, it can eliminate the effect of companies scale and the difference of the industries. After considering the actual state of Chinas listed companies and the distinguishing characteristic of the financial companies, this paper selects the following indicators: (i) Solvency indicators: it includes the long-run solvency and short-run solvency. And it is an importance indicator to measure the financial state of companies. It contains: liquidity ratioquick

- 370 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

ratio, cash to current liability ratio, equity ratio, debt-asset ratio, debt-equity ratio, aggregate liability and interest cover. (ii) Profitability indicators: as the center of the financial system, profitability indicators can reflect the profitability of the companies. It contains: gross profit of main business, net profit of main business, ratio of return on total assets, total accruals to total assets and rate of return. (iii) Operating capacity indicators: it reflects companies operational efficiency and contains: accounts receivable turnover, inventory turnover and total assets turnover. (iv) Grow indicators: it contains: the growth rate of main business income, the growth rate of operating profit, the growth rate of net profit, the growth rate of total asset and the growth rate of net asset. (v) Cash flow indicators: it reflects the message of the cash flow. And it contains: cash rate of sale, net cash flow from operating activities of every share and cash flow in and out of operating activities. The 24 financial indicators mentioned above is the foundation of choice. Then find out which indicators of 24 ones have great difference between financial distress companies and financial normal companies. Firstly, delete the low distinguishing indicators through the test of significance. By T test, liquidity ratioquick ratio, cash to current liability ratio, equity ratio, aggregate liability, inventory turnover and total assets turnover, return on assets and debt-asset ratio are selected, and by correlation test on the rest 12 indicators, some relative highly indicators are removed. By correlation test, cash to current liability ratio, debt-equity ratio, inventory turnover, total assets turnover and debt-asset ratio are left. (2) Non-financial indicators Though the qualitative description on the relation between non-financial indicators and financial distress is numerous, non-financial indicators are difficult to quantize, therefore it can not be studied by quantification. This paper selects non-financial indicators based on the selection of governance structure indicator and ownership structure. In view of the data source, this paper adopts the following indicators to study: (i) Indicators reflecting ownership concentration: CRi means the sum of the former i shareholding ratio, and it used to describe the distribution of the shareholding. The larger of Z indicator (first-second ratio), the bigger control right of the first owner of the company, on the contrary, the smaller of Z indicator, the larger of the other shareholders right, and their positivity on managing the corporate will be improved. In this paper, CR-5 indicator and Z indicator are adopted. (ii) Characteristic indictors of board. In this paper, 5 indicators are used to describe the characteristic of board: board size, the ratio of independent director, the number of stocks belonged to chairman of the board, the ratio of ownership of the chairman of the board, the ratio of ownership of the position director. Just the same as financial indicators, firstly, we have correlation test on the non-financial indicators mentioned above, and then delete the highly correlative indicators. By the correlation test, the number of stocks owned by the chairman of the board and the ratio of ownership of the chairman of the board are deleted, leaving CR_5 indicatorZ indicatorboard sizethe ratio of independent director and the ratio of ownership of the director. The indicators chose finally can be seen in table I and table II TABLE 2. NON-FINANCIAL INDICATORS
x6 x7 x8 x9 x10 board size the ratio of independent director The ratio of the ownership of director CR_5 indicator Z indicator

- 371 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

4.3. Model
In this paper, the Logistic regression model is adopted. The Logistic regression method is mainly used to predict the value of two-value variable or order variable, and is an effective method to solve the 0-1 regression problems. Wu Shinong and Lu Xianyi (2002) believe that FAR of the Logistic model is lowest. This model is set up based on FDP, and its variables need not on the condition of multivariate normal distribution and the equation of two teams covariance. Logistic model supposed that the probability of bankruptcy is P (1 if bankrupt, o if non- bankrupt), and LN [p/ (1-p)] can be explained by financial ratio linear. Suppose Xi is the prediction variable matrix of number i company to have financial distress, and there are relations between Pi and Xi as follows:

Pi

exp(Yi) 1 exp(Yi)

, Where Yi a i bi x i

Yi means longitudinal cut value, and it reflects the quantitative characters of the number i term financial state of listed companies; bi is Logistic regression coefficient, and it reflects the importance of some relative independent variable Xi; Xi is a variable relating with financial distress prediction; ai is constant term. Pi is the probability of having financial distress. The shape of Logistic regression model is S curve, and the max of prediction is approaching to 1, and the min is approaching to 0. Commonly, the Logistic regression model chooses 50% as cut point. Suppose that financial distress company is 1, financial normal company is 0, it means that if the calculated Pi is greater than 0.5, it is a failure company, otherwise, it is a health company. The choose of cut point of this paper draws lessons from the research method of Zhang Houqi and so on (2002), choosing the point with highest precision as the cut point, that is to say, in t-1 year model, 0.45 is chose as the cut point; in t-2 year model, 0.5 is chose; and in t-3 year model, 0.6 is chose.

5.

RESULTS

In this paper, Logistic regression method is adopted to set up distress prediction model, and it is divided into 2 groups: the first group selects financial indicators as independent variable to set up distress prediction model1; the second group selects financial and non-financial indicators as independent variable to set up distress prediction model2. TABLE 4. LOGISTIC REGRESSION RESULT OF MODEL1 IN T-2 YEAR
B cash to current liability ratio Debt-equity ratio Debt-asset ratio Inventory turnover total assets turnover Constant -0.051 0.132 1.988 -0.092 -1.680 -0.063 S.E 0.786 0.172 1.738 0.078 1.175 1.053 Wald 0.004 0.587 1.309 1.392 2.045 0.004 Sig. 0.949 0.444 0.253 0.238 0.153 0.952 Exp(B) 0.951 1.141 7.303 0.912 0.186 0.939

- 372 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

TABLE I.
x1 x2 x3 x4 x5

FINANCIAL INDICATORS

Cash to Current Liability Ratio Debt-Equity Ratio Debt-asset Ratio Inventory Turnover Total Assets Turnover

TABLE 5. LOGISTIC REGRESSION RESULT OF MODEL1 IN T-1 YEAR B Cash to current liability ratio Debt-equity ratio Debt-asset ratio Inventory turnover Total assets turnover Constant -0.038 0.061 4.728 -0.237 -4.635 0.128 S.E 1.306 0.074 1.699 0.110 1.749 1.246 Wald 0.001 0.660 7.742 4.659 7.020 0.011 Sig. 0.977 0.416 0.005 0.031 0.008 0.918 Exp(B) 0.963 1.062 113.034 0.789 0.010 1.136

5.1. Logistic Model1 with Financial Indictors as Independent Variable

Firstly, cash to current liability ratio, debt-equity ratio, inventory turnover, total assets turnover and debt-asset ratio are selected as independent variable for regression. The results can be seen in Table IIITable IV and Table V as follows TABLE 3. LOGISTIC REGRESSION RESULT OF MODEL1 IN T-3 YEAR
Cash to current liability ratio Debt-equity ratio Debt-asset ratio Inventory turnover Total assets turnover Constant B -1.103 -0.111 0.782 0.006 0.476 -0.101 S.E 0.750 0.202 1.752 0.018 0.908 0.978 Wald 2.160 0.304 0.199 0.103 0.275 0.011 Sig. 0.142 0.581 0.655 0.748 0.600 0.918 Exp(B) 0.332 0.895 2.186 1.006 1.609 0.904

TALBLE 6. LOGISTIC REGRESSION RESULT OF MODEL2 IN T-3 YEAR

B Cash to current liability rat io Debt-equity ratio Debt-asset ratio Inventory turnover Total assets inventory Board size Independent- director ratio Position-director ratio CR_5 indicator Z indicator Constant -0.972 -0.094 1.275 0.009 0.422 -0.015 1.461 -0.229 0.318 0.005 -1.044 S.E 0.784 0.213 1.880 0.017 0.940 0.086 2.807 1.023 2.239 0.003 2.056 Wald 1.539 0.197 0.460 0.309 0.202 0.031 0.271 0.050 0.020 2.432 0.258 Sig. 0.215 0.657 0.498 0.578 0.653 0.860 0.603 0.823 0.887 0.119 0.612 Exp(B) 0.378 0.910 3.580 1.009 1.526 0.985 4.308 0.795 1.374 1.005 0.352

- 373 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

TABLE II. LOGISTIC REGRESSION RESULT OF MODEL1 IN T-3 YEAR

Cash to current liability ratio Debt equity ratio Debt assets ratio Inventory turnover Total assets turnover Board size Independent- director ratio Position-director ratio CR_5 indicator Z indicator Constant B 0.332 0.076 3.282 -0.027 -1.084 -0.093 -6.208 0.034 1.123 0.003 0.715 S.E 0.772 0.104 1.538 0.043 1.242 0.099 4.208 1.231 2.252 0.003 2.411 Wald 1.805 0.529 4.557 0.397 0.762 0.900 2.176 0.001 0.248 1.304 0.088 Sig. 0.667 0.467 0.033 0.528 0.383 0.343 0.140 0.978 0.618 0.253 0.767 Exp(B) 1.394 1.079 26.639 0.973 0.338 0.911 0.002 1.034 3.073 1.003 2.045

p t 3

exp( 0 . 101 1 . 103 x 1 0 .111 x 2 0 . 782 x 3 0 .006 x 4 0 .476 x 5 ) 1 exp( 0 . 101 1 . 103 x 1 0 .111 x 2 0 .782 x 3 0 . 006 x 4 0 . 476 x 5 )

(1)

pt 2

exp(0.063 0.051x1 0.132 x 2 1.988 x 3 0.092 x 4 1.680 x 5 ) 1 exp(0.063 0.051x1 0.132 x 2 1.988 x 3 0.092 x 4 1.680 x 5 )

(2)

pt 1

exp(0.128 0.038x1 0.061x 2 4.728x3 0.237x 4 4.635x5 ) 1 exp(0.128 0.038x1 0.061x 2 4.728x3 0.237x 4 4.635x 5 )

(3)

And Pt-1 is the probability of having financial distress in t-1 year; Pt-2 is the probability of having financial distress in t-2 year; Pt-3 is probability of having financial distress in t-3year.

5.2. Logistic model with financial and non-financial indicators as independent variable
Based on the financial indictors selected mentioned above, some non-financial indicators are added into the model; where cash to current liability ratio, debt-equity ratio, inventory turnover, total assets turnover, debt- asset ratio, board size, independent-director ratio, position-director ratio, CR_5 indicator and Z indicator are selected as independent variables to set up distress prediction model. The result can be seen in Table VI, Table VII and Table VIII as follows: According to Table VI, Table VII and Table VIII, Logistic regression equation is as follows: And Pt-1 is the probability of having financial distress in t-1 year; Pt-2 is the probability of having financial distress in t-2 year; Pt-3 is the probability of having financial distress in t-3 year. Put the data of the sample into the equation (1) to equation (6), and then work out the value of P and compare the value of P with the cut point of this paper, furthermore, and compare with the factual state of the company in order to get the prediction accuracy of the model. The result can be seen in Table IX: The result above shows that no matter in t-1 yeart-2 year or t-3 year, the precision of mixed model is higher than that of pure financial indicator model, and it means that capable of predicting of mixed model is much stronger than that of pure financial indicator model, and putting non-financial indicators into financial distress prediction model can improve the capable of predicting of the model. By comparing the precision of t-1 yeart-2 year and t-3 year, we can get the order of precision t1>t-2>t-3, that is to say, no matter it is pure financial indicator model or mixed model, the precision of t-1 year is the highest, t-2 in the middle, and t-3 is the last. It means that the nearer to the happening of financial crisis of listed companies, the better of the capable of predicting. In the meantime, by

- 374 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

transverse comparing, the precision of prediction of the mixed model in t-3 year is 8% higher than that of pure financial indicator model. The great improvement on the precision of predicting shows that the timeliness and precision of predicting on long-run of mixed model is much better than pure financial model.
exp( 1 .044 0 .972 x 1 0 .094 x 2 1 .275 x 3 0 .009 x 4 0 .422 x 5 p t 3 0 .015 x 6 1 .461 x 7 0 .229 x 8 0 .318 x 9 0 .005 x 10 ) 1 exp( 1 .044 0 .972 x 1 0 .094 x 2 1 .275 x 3 0 .009 x 4 0 .422 x 5 0 .015 x 6 1 .461 x 7 0 .229 x 8 0 .318 x 9 0 .005 x 10 )

(4)

exp(0.715 0.332 x1 0.076 x 2 3.282 x3 0.027 x4 1.084 x5 pt 2 0.093x6 6.208 x7 0.034 x8 1.123x9 0.003x10 ) 1 exp(0.715 0.332 x1 0.076 x2 3.282 x3 0.027 x4 1.084 x5 0.093x6 6.208 x7 0.034 x8 1.123x9 0.003x10 )

(5)

TABLE 8. LOGISTIC REGRESSION RESULT OF MODEL1 IN T-3 YEAR

B S.E Wald Sig. Exp(B)

Cash to current liability ratio Debt equity ratio Debt assets ratio Inventory turnover Total assets turnover Board size Independent- director ratio Position-director ratio CR_5 indicator Z indicator Constant

-0.783 0.088 5.249 -0.145 -3.081 -0.096 -4.055 -2.295 -1.062 -0.010 2.167

1.557 0.093 1.826 0.106 1.745 0.115 5.442 1.772 2.213 0.006 2.870

0.253 0.906 8.264 1.866 4.742 0.690 0.555 1.677 0.230 2.897 0.570

0.615 0.341 0.004 0.172 0.029 0.406 0.456 0.195 0.631 0.089 0.450

0.457 1.092 190.465 0.865 0.022 0.909 0.017 0.101 0.346 1.010 8.728

exp(2.167 0.783x1 0.088 x2 5.249 x3 0.145 x4 3.801x5 pt 1 0.096 x6 4.055 x7 2.295 x8 1.062 x9 0.010 x10 ) 1 exp(2.167 0.783x1 0.088 x2 5.249 x3 0.145 x4 3.801x5 0.096 x6 4.055 x7 2.295 x8 1.062 x9 0.010 x10 )

(6)

6. CONCLUSION
This paper employs Logistic model to empirically study the pure financial indicator model and mixed model of companies in manufacturing industries of China, based on substantial literatures on financial crisis prediction of scholars. At first, pertaining to the effect of non-financial indicators, the precision of predicting of the model can be improved greatly by adding non-financial indicators into the model, comparing with that of pure financial indicator model. It shows that using the non-financial indictors when establishing financial crisis prediction model is feasible and can improve the effect of predicting of the model. Secondly, from the factual operation state of ST companies, we find that companys falling into financial crisis is not sudden, but a continuous and dynamic process. Therefore, it is necessary to

- 375 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

analyze the data of one year, two year and three year before its ST. In this paper, non-financial indicators are introduced into crisis prediction model, then establishing the prediction model suitable to one year, two year and three year prior to its ST. We find that the prediction of mixed model is timelier; moreover, the prediction on long-run is more precise. TABLE 9. TYPE SIZES FOR CAMERA-READY PAPERS
year t-1 total t-2 total t-3 total ST Non-ST 31 33 19 17 ST Non-ST 37 40 13 10 ST Non-ST Pure financial indicator model T 39 44 F 11 6 accuracy% 78 88 83 74 80 77 62 66 64 ST Non-ST 34 38 16 12 ST Non-ST 39 39 11 11 ST Non-ST Mixed model T 42 43 F 8 7 accuracy% 84 86 85 78 78 78 68 76 72

Thirdly, from the view of prediction results, the closer to the time to be ST is, the higher the precision of model prediction. Moreover, the model makes a quantitative prediction on whether individual share is ST or not, and the result is more visual. Furthermore, there are still some limitations in this paper, and the following are the main parts: (1) the limitations on the selection of the sample, this paper focuses on the listed manufacture companies, therefore, whether the model is suitable for other industries is the further research direction. (2) The variables selected for prediction is limited. The limitations on non-financial indicators are dominating, for many non-financial indicators are difficult to be quantitative. Therefore, the selection of nonfinancial indicators in this paper is restricted to indicators of equity and indicators of board of directors, without considering other non-financial indicators, such as ability of leaders, company scale, auditing opinion, share price and so on. It is still far for us to study the financial crisis prediction model systematically.

7. ACKNOWLEDGMENT
Sincere gratitude is hereby extended to the following that never ceased in helping until this paper is structured: Zhuang Luxi, Yan Chenxi, who contributed positively in the analysis and interpretation of data; Dr. Dou Junsgeng and Prof. Wang Luzhuang, for sharing their precious time and positive insights.

8. REFERENCES
[1] Altman, Haldeman and Narayanan. Zeta Analysis: A New Model to Identify Bankruptcy Risk of Corporation, Journal of Banking and Finance, pp29-54, 1977. [2] Abdul Majid, Yeon Soo Lee, "Correlating Lattice Constant of Cubic Perovskites to Atomic Parameters Using Support Vector Regression", AISS, Vol. 2, No. 3, pp. 118 ~ 127, 2010 [3] Kyung-Min Min, Nam-Hyuk Ham, Ju-Hyung Kim, Yoon-Sun Lee, Jae-Jun Kim, "An Application Strategy for PLM in Construction Industry", JDCTA, Vol. 2, No. 1, pp. 4 ~ 10, 2008 [4] Ming-Hsiang Su, Pao-Ta Yu, "A Directable and Designable Course Recording System", JCIT, Vol. 6, No. 3, pp. 234 ~ 243, 2011 [5] Altman, E. I., Financial Ratios, Discriminate Analysis and the Prediction of Corporate Bankruptcy, Journal of Finance, 23, pp. 589-609, 1968. [6] Aziz, A. and G. H. Lawson, Cash Flow Reporting and Financial Distress Models: Testing of Hypotheses, Financial Management, 18, pp. 55-63, 1989.

- 376 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

[7] Bahnson, P. R. and J. W. Bartley, The Sensitivity of Failure Prediction Models to Alternative Definition of Failure, Advance in Accounting, 10, pp. 255 -78, 1992. [8] Barcly, M. and C. Holderness, Private Benefits from Control of Public Corporations, Journal of Financial Economics, 25, pp. 371-95, 1989. [9] Beaver, W. H., Financial Ratios as Predictors of Failure, Journal of Accounting Research, 4, pp. 71-102, 1966. [10] Beaver. W. H., Financial Ration as Predictors of Failure, Journal of Accounting Research (Supplement), pp. 71-111, 1966. [11] Bergstrom, C. and K. Rydqvist, Ownership of Equity in Dual-Class Firms, Journal of Banking and Finance, 14, pp. 255-69, 1990. [12] Blum, M., Failing Company Discriminant Analysis, Journal of Accounting Research, 12, pp. 125, 1974. [13] Cao Defang, Xia Haoqin. The Model of Financial Distress Prediction Based on Ownership Structure. Nankai Business Review, pp. 85-90, August 2005. (in Chinese) [14] Casey, C. J. and N. J. Bartczak, Cash Flow- Its Not the Bottom Line, Harvard Business Review, 62, pp. 60-66, 1984. [15] Chan, S. H., Martin, J., and J. Kensinger, Corporate Research and Development Expenditures and Share Value, Journal of Financial Economics, 26, pp. 255-76, 1990. [16] Chen, C. W. and B. K. Church, Default on Debt Obligations and the Issuance of Going-Concern Opinions, Auditing: A Journal of Practice and Theory, 11, pp. 30-49, 1992. [17] Chen Jin, The Empirical Analysis on the Financial Distress Prediction of the Listed Corporate, Accounting Research. 4, pp. 31-38,1999. (in Chinese) [18] Chen Lianghua, Sun Jian, Corporate Governance and Financial Distress: Evidence from Shanghai Security Market, Journal of Southeast University Philosophy and Social Science Edition, 7, pp. 28-31, 2005. (in Chinese) [19] Chen Xiao, Chen Zhihong, A Study on Prediction of Financial Distress in Chinas Listed Companies, China Accounting and Finance Review, 2009, 9. [20] Claessens, S., S. Djankov and L. H. P. Lang, The Separation of Ownership and Control in East Asian Corporation. Journal of Financial Economics, 58, pp. 81-112, 2000. [21] Claessens, S., S. Djankov, and L. Klapper, Resolution of Corporate Distress: Evidence from East Asias Financial Crisis, The First Annual World Bank Group-Brookings Institution Conference, Palisades, New York, 1999. [22] Claessens, S., S. Djankov, J. Fan, and H. P. Lang, Disentangling the Incentive and Entrenchment Effects of Large Shareholdings, Policy research working paper 2088, The World Bank, 2001. [23] Dechow, P. M. and D. J. Skinner, Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators, Accounting Horizons, 14, pp. 235-50, 2000. [24] Delaney, K. J., Strategic Bankruptcy: How Corporate and Creditors Use Chapter 11 to Their Advantage, University of California Press, 1991. [25] Edith S. Hotchkiss, Kose John, Robert M. Mooradian and Karin S. Thorburn, Bankruptcy and the Resolution of Financial Distress, Handbook of Empirical Corporate Finance, pp. 235-286, 2007. [26] E.I. Altman and E. Hotchkiss, Corporate Financial Distress and Bankruptcy, John Wiley and Sons, 2006 [27] Faccio, M. and L. H. P. Lang, The Separation of Ownership and Control: An Analysis of Ultimate Ownership in Western European Corporations, 2000 European Financial Management Association Annual Meeting, 2000. [28] Fan, P. H. and T. J. Wong, Corporate Ownership Structure and the Informativeness of Accounting Earnings in East Asia, The Seventh Asia-Pacific Finance Association Annual Conference, 2000. [29] Foster, B. P., T. J. Ward, and J. Woodroof, An Analysis of the Usefulness of Debt Defaultsand Going Concern Opinions in Bankruptcy Risk Assessment, Journal of Accounting Auditing and Finance, summer, pp. 351-71, 1998,. [30] Gai Liwei, A Study on Financial Distress Prediction Model Based on Non-financial Indicators, Finance and Accounting Research, pp. 268~269, Jan. 2008.

- 377 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

[31] Gentry, J. A., P. Newbold, and D. T. Whitford, Funds Flow Comp onents, Financial Ratios, and Bankruptcy, Journal of Business Finance and Accounting, 14, pp. 595-606, 1987. [32] G. Eason, B. Noble, and I. N. Sneddon, On Certain Integrals of Lipschitz-Hankel Type Involving Products of Bessel Functions, Phil. Trans. Roy. Soc. London, vol. A247, pp. 529551, April 1955. [33] Healy, P. M. and J. M. Wahlen, A Review of the Earnings Management Literature and Its Implications for Standard Setting, Accounting Horizons, 13, pp. 365-83 1999. [34] Jensen M C. The modern industrial revolution, exit and the failure of internal control systems. Journal of Finance, 48, pp. 831-880, 1993. [35] Jiang Xiuhua, Sun Zheng, Governance Weakening and Financial Distress: A Fore-casting Model, Nankai Business Review, pp. 19-25, May 2001. [36] Kose John, Financial distress and resolution: Introduction to the focused issue, Journal of Financial Stability, pp. 195-197, 2007. [37] Michael Nwogugu, Decision-making, Risk and Corporate Governance: A Critique of Methodological Issues in Bankruptcy/ Recovery Prediction Models, Applied Mathematics and Computation, pp.179-196, 2007. [38] P. Asquith, R. Gertner and D. Scharfstein, Anatomy of Financial Distress: An Examination of Junk-bond Issuers, The Quarterly Journal of Economics, pp.625-658, 1994. [39] Pablo Bustelo, Novelties of Financial Crisis in the 1990s and the Search for New Indicators, Emerging Markets Review, pp. 229-251, 2000. [40] Platt H.D and M.B Platt, Predicting Corporate Financial Distress: Reflection on Choice-Based Sample Bias., Journal of Economics and Finance, 2002. [41] S.C. Gilson, Management Turnover and Financial Distress, Journal of Financial Economics, pp. 241-262, 1989. [42] Tsun-Siou Lee, Yin-Hua Yeh, Corporate Governance and Financial Distress: Evidence from Taiwan, Corporate Governance: An International Review, pp. 378-388, March 2004. [43] Zahid Iqbal, Dan W. French, Executive Share Owner, Trading Behavior and Corporate Control: Evidence from Top Management Turnover during Financial Distress, Journal of Economics and Business, pp. 298-312, 2007. [44] Zhang Yuqing, The Importance of Financial Prediction in Risk Management of Listed Companies in China, Financial Management, pp. 52-53, November 2008. (in Chinese) [45] Zhang Ling, Financial Distress Discriminant Analysis Model and Its Application, The Journal of Quantitative & Technical Economics, pp. 38-40, June 2000. (in Chinese) [46] Zhang Jian, Research on the Internal Governance Structure, Ownership Structure and Financial Distress of Listed Corporate in China, Master Thesis of Jilin University, Jilin University, 2004(in Chinese) [47] Zhang Houqi, Financial Distress Prediction System of Listed Corporate: Theory Study and Evidence Analysis, Shanghai Securities Unit Research, 2002(in Chinese) [48] Wu Shinong and Lu Xianyi, A Study of Models for Predicting Financial Distress in Chinas Listed Companies, Economic Research Journal, pp. 46-55, June 2001. [49] Wang Zongjun, Xiong Yinping and Deng Xiaolan, Non-Financial Infornation and Financial Distress PredictionEvidence from Chinese Listed Companies, Value Engineering, pp. 155-158, August 2006. (in Chinese) [50] Zhang Aiming, Zhu Chunshan and Xu Danjian, Principle Components Prediction Model and the Empirical Study of Financial Failure of Public Company, Journal of Finance, pp. 10-25, March 2001. (in Chinese) Li Jiming, was born in Hefei, China, on April 15, 1970. He graduated from Zhejiang University in 1992 with a Master of management engineering. For several years Li worked as a teacher in Zhejiang University. He completed his Ph.D. in management on June 21, 2009. Li Jiming is Associate Professor, Zhejiang University College of Economics, and Associate Professor, Department of Applied Finance, Zhejiang University City College. He is author of 16 peerreviewed publications, 4 books and over 30 conference abstracts. He has given over 4 invited, keynote and plenary lectures at conferences and workshops around the world.

- 378 -

An Empirical Study on the Corporate Financial Distress Prediction Based on Logistic Model: Evidence from Chinas Manufacturing Industry Li Jiming, Du Weiwei International Journal of Digital Content Technology and its Applications. Volume 5, Number 6, June 2011

The Research Interests of Associate Profession Li are: mathematical modeling of environmental quality, statistical methods and uncertainty analysis; decision making; integrated assessment models. In recent year the research conducted by Associate Professor Li and his team concerns the corporate financial distress prediction.

Du Weiwei is birthed at 1986, graduating from Zhongnan University of Economics and Law. She has taken part in many leagues during school time and has worked at Ningbo BankYinzhou Bank and so on during summer holidays. Now she is studying at Zhejiang University to get the Master of Finance.

- 379 -