Review of Corporate Governance Practices and Financial Distress Prediction (original) (raw)
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The influence of good corporate governance on financial distress
Insyma 15, 2018
This study aims to analyze the influence of good corporate governance (GCG) on financial distress. This study also aims to create a bankruptcy prediction model by using historical data from nonfinancial sector companies listed on Indonesia Stock Exchange (IDX) over the period of 2011 - 2015. This study used quantitative approach by using logistic regression. The final sample used in this study were 337 companies with 1,685 years observation. The study findings suggest that the proportion of independent outside directors, audit opinion, size, and ownership type from the category of good corporate governance are incorporated into the model. All the variables are significant. The results suggest that the accuracy of this bankruptcy prediction model was 99.7%.
CORPORATE GOVERNANCE AND ACCURACY LEVEL OF FINANCIAL DISTRESS PREDICTION MODELS
This investigation verifies the impact of corporate governance measure on the likelihood of financial distress on the Spanish Stock Exchange for the time period from 2007 to 2012. We applied an empirical study with panel data and conducted regression logistic models with the objective to calculate different measures of goodness of fit. The results of this study show that the prediction power of the financial distress models improves with the incorporation of some corporate governance measures. INTRODUCTION One of the most questioned elements in the actual economic crisis has been the role of the corporate governance in the development of companies' decline. Specifically, previous research emphasize the agency problems between managers and shareholder, when the companies are in a context of financial distress situation, and the role of board of directors in its function of monitoring and controlling managerial opportunism behavior in those cases. In this sense, a large body of literature has highlighted the importance of corporate governance and its influence on the likelihood of financial distress or bankruptcy (Donker et al, 2009; Fich & Slezak, 2008; Lajili & Zéghal, 2010; Mangena & Chamisa, 2008). However, these researchs has been limited to certain context, such a U.S., Taiwan and China, and on bankruptcy or legal processes. For this reason, the extension of analysis to other geographic context and to other financial distress situations different to bankruptcy contributes to complement the existing literature. The Spanish context has corporate governance characteristics that differ of other contexts, such as unitary board system, ownership concentration and voluntary good governance practices. In this context, the literature asserts that it is more likely that there is important agency conflict in financial distress situations. So the study of relationship between corporate governance and financial distress for Spanish firm provides evidence for this type of contexts. Therefore, this research aims to verify if the incorporation of corporate governance measure in the financial distress prediction model increases the accuracy level compared to models based solely on economic and financial data. For this, we use data from Spanish listed companies between 2007 and 2012, and applied panel data statistical methodology in order to answer the previous question. Our results corroborate that, also in contexts of concentrated ownership and unitary board system, where the ability of monitoring and control on managers by board is lower than dispersed ownership contexts, the accuracy level of financial distress prediction models increases as a result of the addition of corporate governance variables.
Predicting the risk of financial distress using corporate governance measures
Pacific-Basin Finance Journal, 2020
Corporate governance is an important determinant of enterprise performance. Poor corporate governance can damage the interests of shareholders, and may lead to company collapse. This paper expands the literature on financial risk management by assessing the effectiveness of aspects of corporate governance for predicting financial distress in a dynamic discrete-time survival analysis model. It is the most comprehensive and thorough study to date, using a large selection of corporate governance measures, financial ratios and macroeconomic variables in a panel data structure over a ten-year period. Furthermore, the paper addresses the association of government ownership with the risk of financial distress in the largest emerging market in the world-China. The results suggest that although corporate governance alone is not sufficient to accurately predict financial distress, it adds to predictive power of financial ratios and macroeconomic factors. In addition, the model provides insights into the role of state ownership, independent directors and some personal characteristics of the Chair/CEO.
Good Corporate Governance Mechanisms and Financial Performance in Controlling Financial Distress
ADPEBI International Journal of Business and Social Science
Purpose – This study aims to investigate the impact of corporate governance mechanisms on financial distress in firms listed on the Indonesia Stock Exchange (IDX). Methodology/approach – This study uses secondary data from the financial statements of firms, between 2014 and 2019. The number of samples that met the established criteria was 341 firms unbalanced panel, which were further analyzed using logistic regression and sub-group logistic regression analysis. Findings – This study concludes that corporate governance mechanisms (independent commissioners and board size of commissioners), has a mixed impact on financial distress. The larger of board commissioners, the better the company's financial condition, while the proportion of independent commissioners has no significant effect on financial distress. Profitability consistently has a significant effect on financial distress. Ownership i.e. state-owned enterprises (SOE) and non-state-owned enterprises (NSOE) change the dire...
International Journal of Accounting & Information Management, 2021
Purpose The purpose of this study is to investigate the impact of corporate governance structures on the likelihood of financial distress in UK listed companies. The paper examines the impact of borrowing and corporate governance structures on financial distress likelihood in UK companies. Design/methodology/approach The study uses a quantitative approach with financial, governance and borrowing measures and data from 270 firm-observations between 2010 and 2018. The study analyses the impact of borrowing and corporate governance structures to indicate financial distress likelihood in British companies. Corporate governance variables such as ownership concentration, independence indicators, chief executive officer duality, director remuneration and corporate loans are considered, as well as the UK Corporate Governance Code. Findings The results indicate that companies with low ownership concentration and a low degree of independence are more likely to incur financial distress. Larger...
Corporate governance effect on financial distress likelihood: Evidence from Spain
Revista de Contabilidad, 2015
The paper explores some mechanisms of corporate governance (ownership and board characteristics) in Spanish listed companies and their impact on the likelihood of financial distress. An empirical study was conducted between 2007 and 2012 using a matched-pairs research design with 308 observations, with half of them classified as distressed and non-distressed. Based on the previous study by Pindado, Rodrigues, and De la Torre (2008), a broader concept of bankruptcy is used to define business failure. Employing several conditional logistic models, as well as to other previous studies on bankruptcy, the results confirm that in difficult situations prior to bankruptcy, the impact of board ownership and proportion of independent directors on business failure likelihood are similar to those exerted in more extreme situations. These results go one step further, to offer a negative relationship between board size and the likelihood of financial distress. This result is interpreted as a form of creating diversity and to improve the access to the information and resources, especially in contexts where the ownership is highly concentrated and large shareholders have a great power to influence the board structure. However, the results confirm that ownership concentration does not have a significant impact on financial distress likelihood in the Spanish context. It is argued that large shareholders are passive as regards an enhanced monitoring of management and, alternatively, they do not have enough incentives to hold back the financial distress. These findings have important implications in the Spanish context, where several changes in the regulatory listing requirements have been carried out with respect to corporate governance, and where there is no empirical evidence regarding this respect.
The Effect of Board and Ownership Structure on the Possibility of Financial Distress
Journal of Accounting and Investment
Research aims: This study aims to examine the effect of corporate governance, specifically relating to the ownership structure and board structure, on the possibility of financial distress.Design/Methodology/Approach: The sample used in this study are companies listed on the Indonesia Stock Exchange (IDX) from 2015 to 2019, excluding the financial industry. Conditional logistic regression is used as the study uses paired data based on the total assets of the company.Research findings: The results of this study indicate that board ownership, independent commissioners, and the board of directors can increase the likelihood of financial distress. On the other hand, institutional ownership and concentrated ownership are proven to have no effect on the likelihood of financial distress. The results of sensitivity testing using logistic regression showed different results on the variable institutional ownership, which is that institutional ownership can increase the likelihood of financial...
Impact of Corporate Governance Practices on Financial Distress: Empirical Evidence from Pakistan
2013
Corporate bankruptcies and poor management strategi es have increased the financial distress situation of the companies due to the non-compliance with the corpor ate governance practices. The purpose of the presen t study is to investigate the impact of corporate gov ernance practices on the financial distress status of the companies by using a sample of 42 financial distres sed and a matched sample of healthy companies. Using the data for the period of 2006 to 2010 from manufactur ing sector of Pakistan, the results of this study reveal that CEO duality and outside block-holders as well as liquidity and firm size have significant impact on financial distress position of firms. The present study shows that the financially distressed firms have lower c hances of independent board. Financially distressed firms hav e larger boards as compared to the financially heal thy firms. The presence of CEO duality impacts signific antly the financial distress situation of the firms and may leads...
The Influence of Good Corporate Governance (GCG) on Financial Distress
Proceedings of the 15th International Symposium on Management (INSYMA 2018), 2018
This study aims to analyze the influence of good corporate governance (GCG) on financial distress. This study also aims to create a bankruptcy prediction model by using historical data from nonfinancial sector companies listed on Indonesia Stock Exchange (IDX) over the period of 2011-2015. This study used quantitative approach by using logistic regression. The final sample used in this study were 337 companies with 1,685 years observation. The study findings suggest that the proportion of independent outside directors, audit opinion, size, and ownership type from the category of good corporate governance are incorporated into the model. All the variables are significant. The results suggest that the accuracy of this bankruptcy prediction model was 99.7%.