Corporate Governance and Bankruptcy Filing Decisions

Abstract

This paper examines the nature and extent of potential linkages between corporate governance characteristics and bankruptcy filing decisions. To test the paper's research hypotheses and follow prior related literature, a sample of financially distressed firms was formed and matched with a group of financially healthy firms in the US between 2001 and 2003. Results show that in addition to lower business and financial health indicators faced by financially distressed firms compared to their financially healthy counterparts, the former group also faced higher director turnover and shorter outside director tenure. In addition, the results indicate that interactions between two or more corporate governance characteristics could have a significant impact on the bankruptcy filing decision, thus suggesting that a multi-theory foundation for governance research could be warranted in the future. Further research is needed to investigate in more depth how boards and management work together, change, make decisions and manage their reputations and careers, not only in the case of financial distress but also in normal business situations. 1 A large body of the literature examining governance and financial distress has been published in the late 1980s through the early and mid-1990s, for example Hambrick and D'

The Impact of Independent Directors on the Cash Conversion Cycle of American Manufacturing Firms

“…The presence of independent directors in the board of directors contributes in shortening the cash conversion cycle which favors American manufacturing firms because a shorter cash conversion cycle improves the efficiency of working capital management and consequently, the financial health the firm. Thus, this study lends some support to the findings of Daily and Dalton (1994); Fich and Slezak (2008); Lajili and Zéghal (2010);and Gill and Biger (2013) in that independent directors and corporate governance improve working capital management efficiency and the financial health of the firm.…”

“…However, independent directors still are in a position to advise and support the board of directors, which assists in making sound working capital management and other important decisions that are useful in improving the financial health of the firm. Previous studies (Daily & Dalton, 1994;Fich & Slezak, 2008;Lajili & Zéghal, 2010) found that the percentage of independent directors positively affect the financial health of the firm. Foo and Zain (2010) took a sample of 481 companies listed on the Malaysian Stock Exchange and found that more independent and diligent boards are associated with higher liquidity.…”

“…Table 1 show the findings of previous authors related to the relationship between corporate governance and the cash conversion cycle. Daily & Dalton, 1994;Fich & Slezak, 2008;Lajili & Zéghal, 2010 The percentage of independent directors positively impact on the financial health of the firm. Gill & Biger (2013) Corporate governance improves the accounts receivable management efficiency, accounts payable efficiency, and cash conversion cycle efficiency.…”

Corporate board attributes and bankruptcy

“…The evidence from studies on the relationship of corporate governance factors to corporate bankruptcy has been mixed (Daily & Dalton, 1994a, b;Darrat, Gray & Wu, 2010;Fich & Slezak, 2008;Lajili & Zéghal, 2010). Some studies find that bankrupt companies are more likely to have small boards of directors or lose directors as bankruptcy approaches (Darrat, et al, 2010;Gales & Kesner, 1994), while others find just the opposite (Fich & Slezak, 2008).…”

“…Several studies report that this duality is more prevalent in bankrupt firms (Daily & Dalton, 1994a, b;Darrat, et al, 2010), while others do not find this relationship to be predictive (Lajili & Zéghal, 2010). By contrast, the percentage of independent directors relates positively to corporate health (Daily & Dalton, 1994a, b;Darrat, et al, 2010;Fich & Slezak, 2008;Lajili & Zéghal, 2010). Gales and Kesner (1994) go further and observe that companies which fail have different board structures than companies which survive.…”