Survive or die? An empirical study on Chinese ST firms

A number of listed firms that are experiencing financial distress have had a Special Treatment (ST) 'cap' imposed on them by the China Securities Regulatory Commission. The ST 'cap' can be removed if the firms survive financial distress by becoming profitable. Alternatively, a ST firm which goes bankrupt is delisted from the market. Using a sample of 441 ST firms tracked from 1998 to 2011, this paper employs Cox's proportional hazards model to predict turnaround probability for a distressed firm to remove the ST 'cap'. The predictor variables incorporate: (1) accounting-driven ratios, (2) market-driven variables, and (3) information on ownership structure and restructuring status throughout the process. Unlike prior distress studies, accounting variables alone are found to provide the highest prediction accuracy (of 82.2%). Given the uniqueness of the legislations surrounding the suspension and termination of ST firms, this paper adds important new empirical evidence to the current financial distress literature.