The demonstrable research of financial distress cost of China's listed companies

Abstract

As more and more listed companies are falling into financial distress and bankruptcy, the research of financial distress cost become the focus of the theoretical circle. In this paper, 94 listed companies which were special treated in 2002-2006 in Shanghai and Shenzhen stock markets are chosen as the samples to study the financial distress cost adopting the points of business performance and the value of the right. In order to control the sample size and take statistical research, some operations are done to increase the effectiveness of the sample. And some indices are chosen to measure the performances of those listed companies, such as PER and APER, etc. Using these data, the research follows these steps: first, sample selection, second, research of business performances before and after financial distress, third, research of changes in the value of equity before and after financial distress. After this research, we find it inevitable for the investors to undertake the cost of financial distress in the basis of equity value theory, no matter if the average market profit margin of equity is adjusted or not. Because of the position of investors, they have to undertake the corresponding risk for seeking the profit. Also, we find that investors are really charged with financial distress cost. The financial distress cost of listed companies does exist in China. The operating performances of those enterprises improve and sustain in a stable state in the process of distress resolving. In the view of business performances, financial distress may benefit the enterprises. And this provides the theory of financial distress advantage with some evidence. And the financial distress brought about not only losses to enterprises but also certain welfare effects. From the aspect of business performance, the operating performances after adjustment are highly improved. The financial distress has brought benefits.