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Biggest Corporate Failures, the Underlying Agency Problem, and the Corporate Governance Measures

Posted: 7 Dec 2009  

Pankaj K. Maskara

Eastern Kentucky University - Accounting, Finance, & Information Systems

Date Written: December 3, 2009

Abstract

Based on our study of the biggest corporate failures in history from Barings Bank to General Motors we contend that despite the seemingly varied reasons suggested by the media the underlying cause of corporate failures in majority of the cases was agency problem. The academic literature addresses this problem under the umbrella of corporate governance. Majority of the recent studies in this literature measure corporate governance using an index along the lines of G-index developed by Gompers, Ishii, and Metrick (2003). We show that the G-index and/or the entrenchment index of Bebchuk, Cohen, and Ferrell (2009) would have misclassified majority of the firms that we study as well-governed firms. However we also show that majority of the firms that ultimately failed showed deterioration in their corporate governance measure over time as they approached their ultimate demise. We therefore suggest that future studies rely not only on the level of G-index or entrenchment index as a measure of corporate governance but the change in these indices over time.

Keywords: Corporate governance measures, Governance index, entrenchment index

Suggested Citation

Maskara, Pankaj K., Biggest Corporate Failures, the Underlying Agency Problem, and the Corporate Governance Measures (December 3, 2009). Available at SSRN: https://ssrn.com/abstract=1517996

Pankaj K. Maskara (Contact Author)

Eastern Kentucky University - Accounting, Finance, & Information Systems ( email )

United States

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