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Predicting the risk of financial distress using corporate governance measures

Zhiyong Li, Jonathan Crook, Galina Andreeva and Ying Tang

Pacific-Basin Finance Journal, 2021, vol. 68, issue C

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.

Keywords: Corporate governance; Credit risk; Survival analysis; Financial distress; Ownership structure (search for similar items in EconPapers)
JEL-codes: C25 C41 G21 G32 G33 G34 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.pacfin.2020.101334

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