An Empirical Examination of An Early Warning Model Over Financial Crisis By Embodying Financial Ratios And Governing Factors

It’s generally observed that an enterprise that messes up the corporate governance could sooner or later lead itself to financially woes or bankruptcy. Therefore, the the paper is making an attempt to establish an early warning mode combining some financial ratios with some corporate governing factors to predict whether a target company would fail.

The paper studying the companies listed in Taiwan Stock Exchange Board and their operations during 1999 and 2001, exploring the corresponding relations over financial factors as well as governing factors between the two groups, one that of normal companies and the other of the crisis companies, tries to learn whether a listed company is being driven to failure due to the unchecked improper interventions by the top corporate leaders from their self interests.

Chapter II explores the definition of the financial crisis, the evolutions of the statistical methods used for analyzing financial crisis – from the early single variable analysis, multi-variable analysis to the double element regression; as well the agency problems, the roles of the Board and Auditors, their functions and compositions. Chapter III devises the research over a sample of forty-five listed companies, fifteen in crisis state and thirty in normal state, that uses the 1:2 match for a comparison of their corresponding factors to introduce four assumptions that followed with the statistical analysis of the Logit mode, an two-element regression, to verify the assumptions.

The conclusion, based on the empirical findings, shows the early warning mode containing only financial ratios has the poorer ability to distinguish the given companies, being normal or critical in the sample, than the mode that contains both financial ratios as well as governing factors - a proof that the early warning mode with the additional governing factors is better in accuracy.