Corporate Governance and Financial Distress: A Discrete Time Hazard Prediction Model

25 Pages Posted: 26 Jul 2015

See all articles by Zhiyong Li

Zhiyong Li

School of Finance, Southwestern University of Economics and Finance; University of Edinburgh Business School

Jonathan N. Crook

University of Edinburgh - Business School

Galina Andreeva

University of Edinburgh - Business School

Date Written: February 11, 2015

Abstract

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

Suggested Citation

Li, Zhiyong and Crook, Jonathan N. and Andreeva, Galina, Corporate Governance and Financial Distress: A Discrete Time Hazard Prediction Model (February 11, 2015). Available at SSRN: https://ssrn.com/abstract=2635763 or http://dx.doi.org/10.2139/ssrn.2635763

Zhiyong Li (Contact Author)

School of Finance, Southwestern University of Economics and Finance ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China
+8618508226040 (Phone)

University of Edinburgh Business School ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Jonathan N. Crook

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

Galina Andreeva

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

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