Voluntary Corporate Governance Structure and Financial Distress: Evidence from Australia

Abstract

We examine the role of voluntary adoption of corporate governance mechanisms in mitigating the financial distress status of firms. Using a sample of 171 financially distressed and 106 healthy listed Australian firms over the five-year period prior to the introduction of the ASX Corporate Governance Council Code in 2003, we find support for the argument that the adoption of certain corporate governance mechanisms is beneficial for firms, as reflected in a reduced likelihood of financial distress. In particular, greater levels of blockholder and director ownership and the existence of a separate audit committee are associated with lower financial distress likelihood. We also find causal evidence that the voluntary adoption of particular corporate governance structures leads to lower levels of financial distress, rather than financial distress recognition leading to corporate governance structural reform.

Keywords: Corporate Governance; Financial Distress; Ownership; Voluntary Adoption; Agency Theory

JEL Classification: G32, G34