Forecasting Bankruptcy from Financial Distress Data: an Empirical Case Study from China

One of the interesting topics in corporate finance is research concerned with bankruptcy and its prediction. Bankruptcy can result from a firm not being able to make a required bond payment or from a desire by management to restructure its financial obligations. Although bankruptcy itself can have different causes, most cases are preceded by a firm’s inability to meet one or more of its financial obligations. Characterizing these financial distresses is not only useful for investors in a firm’s equity or bond instruments; it is also useful for potential acquiring entities, institutions granting credit or credit ratings, and policy makers. On a high-speed development track, the companies in China are facing more opportunities as well as fierce competitions. The earlier discovery of the sign of financial distress for companies will help the manager take effective steps to improve management at early stage, so as to the financial institutions, which could focus on the potential risks and take corresponding measures. This paper uses a sample of financial statement data of Chinese companies from a domestic bank's customer database to build up a predictive model, which could be applied to forecast financial distress of companies among different industries.

Data prep and estimation