Financial Factors and Financial Crises: Evidence from Financial Statements of Mainland Chinese Firms

Abstract

We work with 18 financial factors that are obtained from a large number of Chinese firms to explore if these financial factors are able to shed light on the possibility of a future financial crisis in China. The financial variables are analyzed via principle component analysis that bunch together into five factors that are used to study the behavior of these factors in terms of their relationship, importance, and significance with firm growth in China. Our results show that the financial factors portray identical behavior during the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. Toward the end of the each financial crisis, firm size became more important and positively related to firm growth since investors became more cautious about the safety of their investments rather than high returns. Thus, our results show that China is not expected to encounter a financial crisis inthe form of the recent financial crises.