Predicting Financial Distress in the Hong Kong Growth Enterprises Market from the Perspective of Financial Sustainability

Hui Hu,Milind Sathye

doi:10.3390/su7021186

Abstract

The present study, according to our knowledge, is the first attempt to establish a financial distress prediction model for a unique set of enterprises, which are the enterprises listed on the specialized Hong Kong Growth Enterprise Market. It also makes an analysis of corporate financial sustainability and its relationship to financial distress prediction. The logistic regression and jackknife method are used to test the predictability of various models with data drawn from the Growth Enterprise Market for the years 2000–2010. The study finds that a model that includes firm-specific financial variables, firm-specific non-financial variables and a macro-economic variable is a better predictor of financial distress than is a model that includes only the first set of variables or a model that includes the latter two sets of variables. It also finds that a model that includes the latter two sets of variables is a better predictor of financial distress than is a model that includes only the first set of variables. These findings are vital for financial sustainability, as investors, policymakers, auditors and stakeholders of this market would find the conclusions emanating from the study extremely useful.

Highlights

Since Hong Kong was handed over to China in 1997, Hong Kong has become an important capital raising centre for Chinese enterprises
We advance the theory of financial distress prediction and propose a comprehensive financial distress prediction model, which is important for maintaining financial sustainability in the Growth Enterprise Market (GEM)
We find that a logistic model that uses financial, non-financial and macroeconomic variables has a slightly higher predictive accuracy of financial distress than does the model that contains non-financial and macroeconomic variables only

Summary

Introduction

Since Hong Kong was handed over to China in 1997, Hong Kong has become an important capital raising centre for Chinese enterprises. Exchange (HKSE), the enterprises are required to achieve a record of at least a three years’ trading history. Since most small and medium enterprises are unable to take advantage of the HKSE, the Hong. Kong Growth Enterprise Market (GEM) was established in 1999 to bridge this gap [1]. The Hong Kong GEM is important for three reasons. The GEM was established for enterprises that are unable to meet the profitability and track record requirement. The GEM has removed the entry barriers for listing on the market for growth enterprises, which either have growth potential or use high technology [2]. Technology companies dominate the GEM, and their continued health is essential to both Hong Kong and China’s global economic competitiveness [3]. It is important that these enterprises are financially sustainable

Objectives

Methods

Results

Conclusion