Corporate governance effect on financial distress likelihood: Evidence from Spain

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.