Prediction of the financial risk of Special Treatment of a Listed Pharmaceutical Company in China: A Principal Component Analysis (Preprint)

Abstract

BACKGROUND The listed pharmaceutical industry of China is growing swiftly by about 10% interest per year. However, risk always keeps pace with improvements. In China, listed companies with significant financial distress or irregularities will be assigned a special treatment (ST) label indicating a risk warning. Recently, eight listed pharmaceutical companies with a ST sign are surviving with but present serious investment risks. OBJECTIVE This paper aimed to discover the most significant factors that cause conversion of a listed pharmaceutical company into an ST firm. Tailored approaches for protecting China’s listed pharmaceutical companies from financial risks are being developed in order to help this domain in profit. Besides, we also aimed to offer suggestions for investors for investigating Chinese listed pharmaceuticals with the goal of assisting the investors in making successful investments. METHODS After collecting data from online databases, a principal component analysis (PCA) model was applied for descending data dimensions. After selecting the components with highest contribution, a logistic regression (LR) model was conducted for simplifying the outcome and calculating the intercept, component coefficients, standard error (SE), and Z and p-values. RESULTS Nine principal components were crucial from the principal component analysis (PCA) model, and two components (components 1 and 5) remaining as the most important factors after the LR model. The estimated intercept was 4.866 (SE 1.096, Z-value 4.442, p < 0.001). The estimated coefficient for components 1 (SE 0.332, Z-value 3.067, p = 0.002) and 5 (SE 0.643, Z-value −2.6, p = 0.009) were 1.017 and −1.672, respectively. CONCLUSIONS Investors are supposed to supervise the accounting conditions in three sectors: (1) solvency, profitability, and research and development (R&D) investment; (2) running the firm properly; and/or (3) investing successfully. Firms are supposed to hire professional partitioners as leaders. The major shareholders should not plan any questionable investments for personal income, and they should ensure the firm works under conditions with low liability, high profitability, and R&D costs that match the perfect growth opportunity after the Coronavirus 2019 (COVID-19) pandemic and the strong growth of China’s economy in 2020.