Corporate Governance and Financial Distress: A Discrete Time Hazard Prediction Model
25 Pages Posted: 26 Jul 2015
Date Written: February 11, 2015
Poor corporate governance can damage the interests of shareholders, and may lead to company collapse. Previous studies in credit risk prediction provide no consensus as to which and how corporate governance variables determine bankruptcy. This paper is the first to apply a discrete time hazard model and a wide selection of 35 corporate governance measures including board composition, ownership structure, management compensation, and director and manager characteristics in predicting corporate credit risk by using a panel dataset of ten years for 1688 companies. We find that state control, institutional ownership, salaries of independent directors, the Chair’s age, the CEO’s education, the work location of independent directors and concurrent CEO positions have significant associations with the risk of financial distress. Governance measures, financial ratios and macroeconomic variables provide the best predictive accuracy. Policy implications are particularly suggested that regulations regarding State-Owned Enterprises and independent directors should be specially focused.
Keywords: Credit risk; Corporate governance; Financial distress; Survival analysis; Default prediction
JEL Classification: G32, G33, G34, G21, C25, C41
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