Financial distress of Chinese firms: Microeconomic, macroeconomic and institutional influences

- Chinese firms are subject to substantial state protection from exits
- We develop a new economic model of financial distress under state protection
- We construct a new firm-level measure of distress and study it determinants
- We find impacts of firm, macro and institutional factors on financial distress
- Comparison with related studies highlight important policy implications

We study the impact of both microeconomic factors and the macroeconomy on the financial distress of Chinese listed companies over a period of massive economic transition, 1995 to 2006. Based on an economic model of financial distress under the institutional setting of state protection against exit, and using our own firm-level measure of distress, we find important impacts of firm characteristics, macroeconomic instability and institutional factors on the hazard rate of financial distress. The results are robust to unobserved heterogeneity at the firm level, as well as those shared by firms in similar macroeconomic founding conditions. Comparison with related studies for China and other economies highlights important policy implications.