Browse > Article
http://dx.doi.org/10.13106/jafeb.2020.vol7.no11.241

Board Structure and Likelihood of Financial Distress: An Emerging Asian Market Perspective  

UD-DIN, Shahab (Business Management Sciences, Karakoram International University)
KHAN, Muhammad Yar (Department of Management Sciences, COMSATS University Islamabad, Wah Campus)
JAVEED, Anam (Management Sciences, University of Wah)
PHAM, Ha (Faculty of Banking and Finance, Ho Chi Minh City Open University)
Publication Information
The Journal of Asian Finance, Economics and Business / v.7, no.11, 2020 , pp. 241-250 More about this Journal
Abstract
This study examines the relationship between the attributes of board structure and the likelihood of financial distress for the non-financial sector of an emerging market characterized by concentrated ownership and family-controlled business. The present study utilized panel logistic regression to estimate the relationship between board structure attributes and the likelihood of financial distress. We used Altman Z-Score as a proxy for firm financial distress, as this tool measures the financial distress inversely. The study finds a significant relationship between board size and the likelihood of financial distress. The results show that a one-unit increase in board size would decrease the probability of financial distress by 3.4%. Further, we observe that a greater level of board independence is associated with a lower likelihood of financial distress. A one-unit increase in board independence would decrease the probability of financial distress by 20.4%. We also find a significant positive impact of leverage on the likelihood of financial distress. The present study contributes to the body of literature on board structure attributes and likelihood of financial distress in emerging markets, like Pakistan. Furthermore, the findings would be beneficial for corporate policymakers and investors in formulating corporate financial strategy and predicting business failure.
Keywords
Corporate Governance; Board Structure; Financial Distress; Emerging Market; Altman Z-Score;
Citations & Related Records
Times Cited By KSCI : 8  (Citation Analysis)
연도 인용수 순위
1 Elloumi, F., & Gueyie, J.-P. (2001). Financial distress and corporate governance: an empirical analysis. Corporate Governance: The International Journal of Business in Society, 1(1), 15-23. https://doi.org/10.1108/14720700110389548   DOI
2 Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. The journal of law and Economics, 26(2), 327-349.   DOI
3 Fuzi, S. F. S., Halim, S. A. A., & Julizaerma, M. (2016). Board independence and firm performance. Procedia Economics and Finance, 37, 460-465. https://doi.org/10.1016/S2212-5671(16)30152-6   DOI
4 Greenbury, R. (1995). Report of the Committee on Executive Remuneration. London, UK: Gee J. Co Ltd.
5 Hambrick, D. C., & D'Aveni, R. A. (1992). Top team deterioration as part of the downward spiral of large corporate bankruptcies. Management Science, 38(10), 1445-1466. http://dx.doi.org/10.1287/mnsc.38.10.1445   DOI
6 He, L., Evans, E., & Wright, S. (2007). Does better corporate governance result in lower earnings management? Keeping Good Companies, 59(6), 330. https://doi.org/10.1007/s10551-013-1700-8
7 Hermalin, B. E., & Weisbach, M. S. (1988). The determinants of board composition. The RAND Journal of Economics, 589-606. DOI: 10.2307/2555459   DOI
8 Higgs, D. (2003). Review of the role and effectiveness of nonexecutive directors. London, UK: Stationery Office.
9 Hodgson, A., Lhaopadchan, S., & Buakes, S. (2011). How informative is the Thai corporate governance index? A financial approach. International Journal of Accounting & Information Management, 9(1), 53-79. DOI:10.1108/18347641111105935
10 Hui, H., & Jing-Jing, Z. (2008). Relationship between corporate governance and financial distress: An empirical study of distressed companies in China. International Journal of Management, 25(4), 654.
11 Lin, F.-Y., Liang, D., & Chu, W.-S. (2010). The role of nonfinancial features related to corporate governance in business crisis prediction. Journal of Marine Science and Technology, 18(4), 504-513.
12 Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. the Journal of Finance, 48(3), 831-880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x   DOI
13 Khan, M. J., Hussain, D., & Mehmood, W. (2016). Why do firms adopt enterprise risk management (ERM)? Empirical evidence from France. Management Decision, 54(8), 1886-1907. DOI:10.1108/MD-09-2015-0400   DOI
14 Lajili, K., & Zeghal, D. (2010). Corporate governance and bankruptcy filing decisions. Journal of General Management, 35(4), 3-26. https://doi.org/10.1177%2F030630701003500401   DOI
15 Lakshan, A., & Wijekoon, W. (2012). Corporate governance and corporate failure. Procedia Economics and Finance, 2, 191-198. https://doi.org/10.1016/S2212-5671(12)00079-2   DOI
16 Lee, T. S., & Yeh, Y. H. (2004). Corporate governance and financial distress: Evidence from Taiwan. Corporate governance: An International Review, 12(3), 378-388. https://doi.org/10.1111/j.1467-8683.2004.00379.x   DOI
17 Lipton, M., & Lorsch, J. W. (1992). A modest proposal for improved corporate governance. The Business Lawyer, 48(1). 59-77.
18 Liu, Y., Miletkov, M. K., Wei, Z., & Yang, T. (2015). Board independence and firm performance in China. Journal of Corporate Finance, 30, 223-244. DOI: 10.1016/j.jcorpfin.2014.12.004   DOI
19 Majeed, M. K., Jun, J. C., Zia-ur-Rehamn, M., Mohsin, M., & Rafiq, M. Z. (2020). The Board Size and Board Composition Impact on Financial Performance: An evidence from the Pakistani and Chinese Listed Banking Sector. Journal of Asian Finance, Economics, 7(4), 81-95. https://doi.org/10.13106/jafeb.2020.vol7.no4.81
20 Mallette, P., & Fowler, K. L. (1992). Effects of board composition and stock ownership on the adoption of "poison pills". Academy of Management Journal, 35(5), 1010-1035. https://doi.org/10.5465/256538   DOI
21 Miglani, S., Ahmed, K., & Henry, D. (2015). Voluntary corporate governance structure and financial distress: evidence from Australia. Journal of Contemporary Accounting & Economics, 11(1), 18-30. https://doi.org/10.1016/j.jcae.2014.12.005   DOI
22 Mangena, M., & Chamisa, E. (2008). Corporate governance and incidences of listing suspension by the JSE Securities Exchange of South Africa: An empirical analysis. The International Journal of Accounting, 43(1), 28-44. https://doi.org/10.1016/j.intacc.2008.01.002   DOI
23 Manzaneque, M., Merino, E., & Priego, A. M. (2016). The role of institutional shareholders as owners and directors and the financial distress likelihood. Evidence from a concentrated ownership context. European Management Journal, 34(4), 439-451. https://doi.org/10.1016/j.emj.2016.01.007   DOI
24 Manzaneque, M., Priego, A. M., & Merino, E. (2016). Corporate governance effect on financial distress likelih+ood: Evidence from Spain. Revista de Contabilidad, 19(1), 111-121. https://doi.org/10.1016/j.rcsar.2015.04.001   DOI
25 Nahar Abdullah, S. (2006). Board structure and ownership in Malaysia: The case of distressed listed companies. Corporate Governance: The International Journal of Business in Society, 6(5), 582-594. DOI 10.1108/14720700610706072   DOI
26 Nakano, M., & Nguyen, P. (2012). Board Size and Corporate Risk-Taking: Further Evidence from Japan. Corporate Governance: An International Review, 20(4), 369-387. https://doi.org/10.1111/j.1467-8683.2012.00924.x   DOI
27 Nanka-Bruce, D. (2009). Corporate governance and multidimensional performance. Barcelona, Spain: Universitat Autonoma de Barcelona.
28 Pearce, J. A., & Zahra, S. A. (1992). Board composition from a strategic contingency perspective. Journal of Management Studies, 29(4), 411-438. https://doi.org/10.1111/j.1467-6486.1992.tb00672.x   DOI
29 Pound, J. (1992). On the motives for choosing a corporate governance structure: A study of corporate reaction to the Pennsylvania takeover law. Journal of Law, Economics and Organizationl, 8, 656.
30 Pfeffer, J. (1972). Size and composition of corporate boards of directors: The organization and its environment. Administrative Science Quarterly, 218-228. http://dx.doi.org/10.2307/2393956
31 Rahman, M. M., & Saima, F. N. (2018). Efficiency of board composition on firm performance: Empirical evidence from listed manufacturing firms of Bangladesh. Journal of Asian Finance, Economics and Business, 5(2), 53-61. https://doi.org/10.13106/jafeb.2018.vol5.no2.53   DOI
32 Salancik, G. R., & Pfeffer, J. (1980). Effects of ownership and performance on executive tenure in US corporations. Academy of Management Journal, 23(4), 653-664. https://doi.org/10.5465/255554   DOI
33 Berle, A., & Means, G. (1932). The Modern Corporation and Private Property. New York, NY: McMillan.
34 Aguilera, R. V., & Cuervo-Cazurra, A. (2009). Codes of good governance. Corporate Governance: An International Review, 17(3), 376-387. https://doi.org/10.1111/j.1467-8683.2009.00737.x   DOI
35 Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609. DOI: 10.2307/2978933   DOI
36 Baysinger, B. D., & Butler, H. N. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), 101-124.
37 Tahir, S. H., Sadique, M. A. B., Nausheen, S., Rehman, F., & Ullah, M. R. (2020). Mediating Role of Liquidity Policy on the Corporate Governance-Performance Link: Evidence from Pakistan. Journal of Asian Finance, Economics and Business, 7(8), 15-23. https://doi.org/10.13106/jafeb.2020.vol7.no8.015   DOI
38 Shahwan, T. M. (2015). The effects of corporate governance on financial performance and financial distress: evidence from Egypt. Corporate Governance, 15(5), 641-662. https://doi.org/10.1108/CG-11-2014-0140   DOI
39 Sheikh, M. F., Bhutta, A. I., & Sultan, J. (2019). CEO Compensation and Unobserved Firm Performance in Pakistan. Journal of Asian Finance, Economics and Business, 6(3), 305-313. https://doi.org/10.13106/jafeb.2019.vol6.no3.305   DOI
40 Tahir, H., Rahman, M., & Masri, R. (2020). Do Board Traits Influence Firms' Dividend Payout Policy? Evidence from Malaysia. Journal of Asian Finance, Economics and Business, 7(3), 87-99. https://doi.org/10.13106/jafeb.2020.vol7.no3.87   DOI
41 Wang, Z.-J., & Deng, X.-L. (2006). Corporate governance and financial distress: Evidence from Chinese listed companies. Chinese Economy, 39(5), 5-27. https://doi.org/10.2753/CES1097-1475390501   DOI
42 Chen, Z., Cheung, Y.-L., Stouraitis, A., & Wong, A. W. (2005). Ownership concentration, firm performance, and dividend policy in Hong Kong. Pacific-Basin Finance Journal, 13(4), 431-449. https://doi.org/10.1016/j.pacfin.2004.12.001   DOI
43 Bethel, J. E., & Liebeskind, J. (1993). The effects of ownership structure on corporate restructuring. Strategic Management Journal, 14(S1), 15-31. https://doi.org/10.1002/smj.4250140904   DOI
44 Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185-211. https://doi.org/10.1016/0304-405X(95)00844-5   DOI
45 Black, B. S., Love, I., & Rachinsky, A. (2006). Corporate governance indices and firms' market values: Time series evidence from Russia. Emerging Markets Review, 7(4), 361-379. https://doi.org/10.1016/j.ememar.2006.09.004   DOI
46 Bredart, X. (2014). Financial distress and corporate governance: the impact of board configuration. International Business Research, 7(3), 72. https://doi.org/10.5539/ibr.v7n3p72
47 Cadbury, A. (1992). Report of the committee on the financial aspects of corporate governance (Vol. 1). London, UK: Gee J. Co Ltd.
48 Chaganti, R. S., Mahajan, V., & Sharma, S. (1985). Corporate board size, composition and corporate failures in retailing industry. Journal of Management Studies, 22(4), 400-417. https://doi.org/10.1111/j.1467-6486.1985.tb00005.x   DOI
49 Chen, I.-J. (2014). Financial crisis and the dynamics of corporate governance: Evidence from Taiwan's listed firms. International Review of Economics & Finance, 32, 3-28. https://doi.org/10.1016/j.iref.2014.01.004   DOI
50 Committee, H. (1998). Final Report of the Committee on Corporate Governance. London, UK: Gee J. Co Ltd.
51 Donker, H., Santen, B., & Zahir, S. (2009). Ownership structure and the likelihood of financial distress in the Netherlands. Applied Financial Economics, 19(21), 1687-1696. https://doi.org/10.1080/09603100802599647   DOI
52 Crespi-Cladera, R., & Pascual-Fuster, B. (2014). Does the independence of independent directors matter? Journal of Corporate Finance, 28, 116-134. DOI: 10.1016/j.jcorpfin.2013.12.009   DOI
53 Daily, C. M., & Dalton, D. R. (1994). Bankruptcy and corporate governance: The impact of board composition and structure. Academy of Management Journal, 37(6), 1603-1617.   DOI