Corporate Governance and Default Risk of Firms Cited in the SEC's Accounting and Auditing Enforcement Releases

43 Pages Posted: 27 Aug 2013 Last revised: 27 Nov 2018

See all articles by Zhiyan Cao

Zhiyan Cao

University of Washington Tacoma

Fei Leng

University of Washington, Tacoma

Ehsan H. Feroz

University of Washington Tacoma, Milgard School of Business-Accounting ; University of Illinois at Urbana-Champaign; Government of the United States of America - US GAO Advisory Council; University of Minnesota Duluth, Labovitz School of Business-Department of Accounting; University of Minnesota, Carlson School of Management-Department of Accounting; American Accounting Association

Sergio Davalos

University of Washington, Tacoma - Milgard School of Business

Date Written: August 26, 2013

Abstract

We examine the relationship between corporate governance and default risk for a sample of firms cited in the Securities and Exchange Commission’s (SEC’s) Accounting and Auditing Enforcement Releases (AAERs). Using hazard analysis of actual default incidence and OLS regressions of a continuous variable capturing a firm’s “closeness to default,” we document changes in the relationships between various governance characteristics and default risk from the pre-AAER period to the post-AAER period. Specifically, smaller board size, greater board independence, greater gender diversity of the board, and lower concentration of institutional ownership are all shown to have a more favorable effect on lowering default risk in the post-AAER period relative to the pre-AAER period. Our comparative analysis of a group of firms with accounting restatements (but not cited in the AAERs) does not show similar changes in the relationships between the various corporate governance characteristics and default risk from the pre-restatement to the post-restatement period. This suggests that the regulatory sanctions experienced by AAER firms may have prompted creditor reevaluation of the firms’ information environment and the perceived efficacy of various corporate governance mechanisms in mitigating default risk.

Keywords: Corporate governance, default risk, Accounting and Auditing Enforcement Releases, information asymmetry, Accounting and Political Economy

JEL Classification: G33, G34, M41, D82, L51, P16

Suggested Citation

Cao, Zhiyan and Leng, Fei and Feroz, Ehsan H. and Davalos, Sergio, Corporate Governance and Default Risk of Firms Cited in the SEC's Accounting and Auditing Enforcement Releases (August 26, 2013). Review of Quantitative Finance and Accounting, 2015, Vol. 44, No. 1, pp. 113-138, Available at SSRN: https://ssrn.com/abstract=2316519 or http://dx.doi.org/10.2139/ssrn.2316519

Zhiyan Cao (Contact Author)

University of Washington Tacoma ( email )

1900 Commerce St, Campus Box 358420
Tacoma, WA 98402-3100
United States
(253) 692-4821 (Phone)
(253) 692-4523 (Fax)

Fei Leng

University of Washington, Tacoma ( email )

1900 Commerce Street
Tacoma, WA 98402-3100
United States

Ehsan H. Feroz

University of Washington Tacoma, Milgard School of Business-Accounting ( email )

1900 Commerce Street, Campus Box 358420
Tacoma, WA 98402-3100
United States
(253) 692 4728 (Phone)
253 692 4523 (Fax)

HOME PAGE: http://www.tacoma.washington.edu/business

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive# 2307
Champaign, IL 61820
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Government of the United States of America - US GAO Advisory Council ( email )

441 G Street NW
Washington, DC 20548-0001
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University of Minnesota Duluth, Labovitz School of Business-Department of Accounting ( email )

10 University Drive
Labovitz School of Business
Duluth, MN 55812
United States
218-726-6988 (Phone)
218-726-8510 (Fax)

University of Minnesota, Carlson School of Management-Department of Accounting ( email )

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Minneapolis, MN 55455
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American Accounting Association ( email )

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Sergio Davalos

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States

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