IDEAS home Printed from https://ideas.repec.org/a/eee/spacre/v19y2016i1p111-121.html
   My bibliography  Save this article

Corporate governance effect on financial distress likelihood: Evidence from Spain

Author

Listed:
  • Manzaneque, Montserrat
  • Priego, Alba María
  • Merino, Elena

Abstract

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.

Suggested Citation

  • Manzaneque, Montserrat & Priego, Alba María & Merino, Elena, 2016. "Corporate governance effect on financial distress likelihood: Evidence from Spain," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 19(1), pages 111-121.
  • Handle: RePEc:eee:spacre:v:19:y:2016:i:1:p:111-121
    DOI: 10.1016/j.rcsar.2015.04.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1138489115000205
    Download Restriction: no

    References listed on IDEAS

    as
    1. Simpson, W. Gary & Gleason, Anne E., 1999. "Board structure, ownership, and financial distress in banking firms," International Review of Economics & Finance, Elsevier, vol. 8(3), pages 281-292, September.
    2. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    3. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    4. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58.
    5. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    6. Johnson, Simon & Boone, Peter & Breach, Alasdair & Friedman, Eric, 2000. "Corporate governance in the Asian financial crisis," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 141-186.
    7. repec:hrv:faseco:30728046 is not listed on IDEAS
    8. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    9. Irene Karamanou & Nikos Vafeas, 2005. "The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 43(3), pages 453-486, June.
    10. Liu, Chunyan & Uchida, Konari & Yang, Yufeng, 2012. "Corporate governance and firm value during the global financial crisis: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 21(C), pages 70-80.
    11. Chung, Richard & Firth, Michael & Kim, Jeong-Bon, 2005. "Earnings management, surplus free cash flow, and external monitoring," Journal of Business Research, Elsevier, vol. 58(6), pages 766-776, June.
    12. Zong-Jun Wang & Xiao-Lan Deng, 2006. "Corporate Governance and Financial Distress: Evidence from Chinese Listed Companies," Chinese Economy, Taylor & Francis Journals, vol. 39(5), pages 5-27, October.
    13. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    14. Grice, John Stephen & Ingram, Robert W., 2001. "Tests of the generalizability of Altman's bankruptcy prediction model," Journal of Business Research, Elsevier, vol. 54(1), pages 53-61, October.
    15. repec:bla:joares:v:4:y:1966:i::p:71-111 is not listed on IDEAS
    16. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    17. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    18. repec:bla:joares:v:6:y:1968:i:2:p:179-192 is not listed on IDEAS
    19. Brickley, James A. & Coles, Jeffrey L. & Terry, Rory L., 1994. "Outside directors and the adoption of poison pills," Journal of Financial Economics, Elsevier, vol. 35(3), pages 371-390, June.
    20. Eliezer Fich & Steve Slezak, 2008. "Can corporate governance save distressed firms from bankruptcy? An empirical analysis," Review of Quantitative Finance and Accounting, Springer, vol. 30(2), pages 225-251, February.
    21. Lex Donaldson & James H. Davis, 1991. "Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns," Australian Journal of Management, Australian School of Business, vol. 16(1), pages 49-64, June.
    22. repec:bla:joares:v:18:y:1980:i:1:p:109-131 is not listed on IDEAS
    23. repec:bla:joares:v:22:y:1984:i::p:59-82 is not listed on IDEAS
    24. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    25. Pindado, Julio & Rodrigues, Luis & de la Torre, Chabela, 2008. "Estimating financial distress likelihood," Journal of Business Research, Elsevier, vol. 61(9), pages 995-1003, September.
    26. Han Donker & Bernard Santen & Saif Zahir, 2009. "Ownership structure and the likelihood of financial distress in the Netherlands," Applied Financial Economics, Taylor & Francis Journals, vol. 19(21), pages 1687-1696.
    27. repec:bla:joares:v:4:y:1966:i::p:123-127 is not listed on IDEAS
    28. Mangena, Musa & Chamisa, Eddie, 2008. "Corporate governance and incidences of listing suspension by the JSE Securities Exchange of South Africa: An empirical analysis," The International Journal of Accounting, Elsevier, vol. 43(1), pages 28-44, March.
    29. Tsun-Siou Lee & Yin-Hua Yeh, 2004. "Corporate Governance and Financial Distress: evidence from Taiwan," Corporate Governance: An International Review, Wiley Blackwell, vol. 12(3), pages 378-388, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:mth:ifb888:v:3:y:2016:i:2:p:162-176 is not listed on IDEAS

    More about this item

    Keywords

    Board of directors; Conditional logistic regression; Corporate governance; Financial distress; Ownership concentration; Consejo de administración; Regresión logística condicional; Gobierno corporativo; Fracaso empresarial; Concentración de la propiedad;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:spacre:v:19:y:2016:i:1:p:111-121. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: https://www.journals.elsevier.com/intelligence .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.