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Stretch or Suppress: Role of Owners and Nominee Directors in Financial Distress

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  • Swechha Chada
  • Sumit Banerjee

Abstract

This study investigates the effect of various firm-level corporate governance mechanisms on the likelihood of financial distress in India. We analyze the competing hypotheses of interest alignment and agency theory, examining how controlling shareholders affect the probability of financial distress. Additionally, we assess the potential impact of institutional investor shareholding and bank-appointed directors on the likelihood of financial distress. Our findings suggest that increasing controlling shareholder ownership decreases the probability of distress. However, the effects of institutional investors and bank-appointed directors vary and also depend on the quantum of shareholding of institutional investors and affiliation with business groups. Our results offer insights into improving governance in economies with higher ownership concentration, weaker institutional frameworks, and greater bank participation in credit facilitation. JEL Codes: G32, G33, G34

Suggested Citation

  • Swechha Chada & Sumit Banerjee, 2023. "Stretch or Suppress: Role of Owners and Nominee Directors in Financial Distress," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 22(4), pages 382-408, December.
    • Handle: RePEc:sae:emffin:v:22:y:2023:i:4:p:382-408
    DOI: 10.1177/09726527231183014
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    Keywords

    Bank-appointed directors; controlling shareholders; corporate governance; financial distress; institutional investors;
    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

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