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Predicting the risk of financial distress using corporate governance measures

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  • Li, Zhiyong
  • Crook, Jonathan
  • Andreeva, Galina
  • Tang, Ying

Abstract

Corporate governance is an important determinant of corporate performance. Poor corporate governance can damage the interests of shareholders, and may lead to business collapse. This paper expands the literature on credit 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 a comprehensive, up-to-date and thorough study, which uses a large range of corporate governance measures, financial ratios and macroeconomic variables in a panel data structure over a 17-year period. Furthermore, the paper addresses the relationship between government ownership and the risk of financial distress in China. The results suggest that although corporate governance alone is not sufficient to accurately predict financial distress, it can add to the predictive power of financial ratios and macroeconomic factors. In addition, the model provides insights into the role of state ownership, independent directors, institutional investors and some personal characteristics of the Chair of the board. Implications are made regarding them and the debt and bankruptcy problem in China and Asia.

Suggested Citation

  • Li, Zhiyong & Crook, Jonathan & Andreeva, Galina & Tang, Ying, 2021. "Predicting the risk of financial distress using corporate governance measures," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:pacfin:v:68:y:2021:i:c:s0927538x19305542
    DOI: 10.1016/j.pacfin.2020.101334
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    References listed on IDEAS

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    Cited by:

    1. Zhou, Fanyin & Fu, Lijun & Li, Zhiyong & Xu, Jiawei, 2022. "The recurrence of financial distress: A survival analysis," International Journal of Forecasting, Elsevier, vol. 38(3), pages 1100-1115.
    2. Umair Bin YOUSAF & Khalil JEBRAN & Man WANG, 2022. "A Comparison of Static, Dynamic and Machine Learning Models in Predicting the Financial Distress of Chinese Firms," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 122-138, April.
    3. Lagasio, Valentina & Brogi, Marina & Gallucci, Carmen & Santulli, Rosalia, 2023. "May board committees reduce the probability of financial distress? A survival analysis on Italian listed companies," International Review of Financial Analysis, Elsevier, vol. 87(C).
    4. Cucinelli, Doriana & Soana, Maria Gaia, 2023. "Systemic risk in non financial companies: Does governance matter?," International Review of Financial Analysis, Elsevier, vol. 87(C).
    5. Balagobei, S, 2022. "Corporate Governance and Financial Distress: Empirical Evidence from listed Consumer Services Firms in Sri Lanka ," GATR Journals afr211, Global Academy of Training and Research (GATR) Enterprise.

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    More about this item

    Keywords

    Corporate governance; Credit risk; Survival analysis; Financial distress; Ownership structure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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