Prediction of financial distress: An empirical study of listed Chinese companies using data mining

Ruibin Geng, Indranil Bose and Xi Chen

European Journal of Operational Research, 2015, vol. 241, issue 1, 236-247

Abstract: The deterioration in profitability of listed companies not only threatens the interests of the enterprise and internal staff, but also makes investors face significant financial loss. It is important to establish an effective early warning system for prediction of financial crisis for better corporate governance. This paper studies the phenomenon of financial distress for 107 Chinese companies that received the label ‘special treatment’ from 2001 to 2008 by the Shanghai Stock Exchange and the Shenzhen Stock Exchange. We use data mining techniques to build financial distress warning models based on 31 financial indicators and three different time windows by comparing these 107 firms to a control group of firms. We observe that the performance of neural networks is more accurate than other classifiers, such as decision trees and support vector machines, as well as an ensemble of multiple classifiers combined using majority voting. An important contribution of the paper is to discover that financial indicators, such as net profit margin of total assets, return on total assets, earnings per share, and cash flow per share, play an important role in prediction of deterioration in profitability. This paper provides a suitable method for prediction of financial distress for listed companies in China.

Keywords: Chinese companies; Financial distress; Financial indicators; Neural network; Majority voting (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (96)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:241:y:2015:i:1:p:236-247

DOI: 10.1016/j.ejor.2014.08.016

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