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

Abstract

We work with financial factors in conjunction with the macro-financial variables of interest to study the behavior of these factors in terms of their relationship, importance, and significance with firm growth in China during and around the 1997 Asian financial crisis and the 2008 global financial crisis. Our results show that the financial factors portray identical behavior during the 1997 Asian financial crisis as well as during the 2008 global financial crisis. Toward the end of the each of these financial crises, firm size became more important and positively related to firm growth revealing that investors became more cautious about the safety of their investments rather than high returns. The results also show that variation in growth rates in economic activity is stronger than that of sales growth rates that are determined by the financial factors and the other macro-financial variables of interest. Thus, our results show that China is not expected to encounter a financial crisis of the form of the recent financial crises.