Universal Journal of Accounting and Finance Vol. 3(2), pp. 89 - 99
DOI: 10.13189/ujaf.2015.030206
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Cross-strait Financial Distress Pre-warning Models that Include Corporate Governance: Reestimating Ohlson's Models

Kuang-hua Hu ^1,*, Da-bai Shen ², Jin-Long Huang ^3
1 Department of Accounting, Nanfang College of Sun Yat-Sen University, China
² Department of Accounting, Soochow University, Taiwan
³ Cosmos Bank, Taiwan

ABSTRACT

This paper uses listed cross-strait (China and Taiwan) companies during 2006–2010 to demonstrate the application of a logistic regression to establish financial distress pre-warning models. The bankruptcy indicators are selected by three stages, namely a Wilcoxon test, a ridge regression, and a stepwise refinement. We attempt to determine whether predictors can be obtained by incorporating corporate governance variables that could increase failure predictability. Both non-outstanding state shares and share-holding of placement institutions are flagged positively and significantly in the pre-warning model in China; this finding conforms with the "conflicts of interest hypothesis." The share-holding by foreign institutions negatively impacts the financial crisis, a finding that is in keeping with the "efficient supervisions hypothesis." The negative and significant relation associated with the director share-holding and financial crisis in Taiwan is in accordance with the "convergence of interest hypothesis." Cross-shareholding has a positive effect on a firm's failure in Taiwan. The results also demonstrate that the integrated model has the best capacity to identify pre-warning models among all models. For the models of estimation, Taiwan's model is slightly superior to China's model.

KEYWORDS
Pre-warning Model, Corporate Governance, Logit Model, Financial Distress

Cite This Paper in IEEE or APA Citation Styles
(a). IEEE Format:
[1] Kuang-hua Hu , Da-bai Shen , Jin-Long Huang , "Cross-strait Financial Distress Pre-warning Models that Include Corporate Governance: Reestimating Ohlson's Models," Universal Journal of Accounting and Finance, Vol. 3, No. 2, pp. 89 - 99, 2015. DOI: 10.13189/ujaf.2015.030206.

(b). APA Format:
Kuang-hua Hu , Da-bai Shen , Jin-Long Huang (2015). Cross-strait Financial Distress Pre-warning Models that Include Corporate Governance: Reestimating Ohlson's Models. Universal Journal of Accounting and Finance, 3(2), 89 - 99. DOI: 10.13189/ujaf.2015.030206.