Does Corporate Governance Quality Reduce Financial Distress? New Panel Evidence from Australia
2016 Accounting & Finance Association of Australia and New Zealand Conference
Posted: 18 Aug 2014 Last revised: 12 Jan 2017
Date Written: August 18, 2014
A series of corporate collapses, a distinctive corporate environment and contradictory findings in literature make Australia an interesting case in which to investigate the association between corporate governance quality (CGQ) and financial distress. In this paper, using a large panel of 1,086 non-financial firms (8,950 observations) from Australia over the period from 2001 to 2013, we construct a composite CGQ index and provide new evidence on the association between CGQ and the financial distress of firms. We find that better governed firms are clearly associated with a lower level of financial distress in Australia, even after controlling for a potential endogeneity bias. These findings are robust to alternative proxies of governance quality, different estimation techniques, and alternative sample specification. We also find that the inverse relationship between CGQ and financial distress is stronger in firms with more growth opportunities and in the post-CG reforms period. These findings are generalizable to the wider economy and have practical implications for regulators and investors.
Keywords: Corporate governance, financial distress, governance reforms, growth opportunities, financial crisis
JEL Classification: G01, G33, G34, G38
Suggested Citation: Suggested Citation