Internal Factors Associated with Business Failures of Public Companies in China —From a Financial Analytical Perspective
Xiangping Zhu

Abstract
This paper is intended to identify the internal factors, especially financial measures that may be associated with the business failures of public companies in China. We use the occurrence of special treatment as a proxy for business failures, because bankruptcy usually doesn’t follow business failures and is not an applicable measure of business failure in China. First, we identified 26 potential financial measures that we believe are associated with business failures. Then, we selected 16 of them that are potentially correlated with the occurrence of business failures. After a factor analysis, the group of financial factors was further downsized to six. They are profitability, liquidity condition, operation efficiency, expense structure, growth condition and profit structure. In the logistic regression, only the factors of profitability, liquidity, growth and profit structure are significantly associated with the likelihood of operation failure for public companies. Based on the four factors, we construct a prediction model for business failures. The overall accuracy of the model is over 80%.

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