Corporate governance and financial distress: Asian emerging market perspective

Abstract

Purpose The purpose of this paper is to examine the impact of corporate governance index (PAKCGI) on firm financial distress for a sample of 152 non-financial firms listed at Pakistan Stock Exchange (PSX) over the period from 2003 to 2017. Design/methodology/approach To examine the impact of PAKCGI on financial distress (Altman Z-Score), random effect model is applied. The PAKCGI is a self-constructed index based on the five important factors of corporate governance practices, i.e. board of directors, audit committees, right of shareholders, disclosures and risk management. The binary coding approach is adopted for the construction of PAKCGI. Altman Z-Score model is used as a proxy for financial distress indicator. The absolute value of Altman Z-score has been taken as financial distress indicator. Findings The outcomes of the study indicate a positive impact of PAKCGI on risk of firms’ financial distress. The positive coefficient of PAKCGI implies that the good corporate practices work as catalyst to reduce risk of financial distress in Pakistan. A significant negative impact of block holders on financial distress suggests that the concentrated block ownership take monopolistic decision to protect their interests. It has also been observed that significant positive impact of institutional ownership on financial distress exists in the Pakistani listed firms. Furthermore, this study also reveals that significant negative association between board size, CEO duality and financial distress indicator. Research limitations/implications The findings may encourage the Pakistani listed companies to follow and implement good corporate governance practices, which would lead to increase the confidence of investors, regulators and stakeholders. Originality/value The current study extends the corporate governance literature by examining the relationship between the corporate governance attributes and the financial distress status of Pakistani listed companies. From the academic perspective, this paper adds to the knowledge concerning the association between corporate governance practices and risk of financial distress in emerging markets.

The Effect of Board and Ownership Structure on the Possibility of Financial Distress

“…The results of the fifth hypothesis test indicate that a larger board size can increase the likelihood of financial distress. This is similar to the findings of Helena and Saifi (2018), Salloum et al (2013), Siagian (2010), andYounas et al (2021). A larger board of directors usually causes an increase in two main problems, communication and coordination which The Effect of Board and Ownership Structure … Journal of Accounting and Investment, 2021 | 618 can slow down the decision-making process (Helena & Saifi, 2018;Salloum et al, 2013;Younas et al, 2021).…”

“…The Effect of Institutional Ownership on the Likelihood of Financial Distress Helena and Saifi (2018) and Younas et al (2021) found that companies with large institutional ownership can avoid financial distress. Li et al (2020) explains that the presence of institutional investors will reduce the possibility of financial distress to occur because institutional investors have the expertise and ability to detect companies that are eligible for investment, so companies with large institutional ownership will be trusted to have better performance.…”

“…On the other hand, Tarigan and Hadiprajitno (2018) and Younas et al (2021) found that concentrated ownership can increase the likelihood of financial distress because it can lead to monopolistic decision making and can reduce the independence of the company. In addition, Jensen (1993) also said that concentrated ownership can lead to information asymmetry between majority and minority shareholders, thereby increasing the probability of financial distress.…”

“…The Effect of Board Size on the Likelihood of Financial Distress Helena and Saifi (2018) and Salloum et al (2013) found that the possibility of financial distress will increase if the size of the board is larger because it can increase communication and coordination problems within the board. Younas et al (2021) also stated that a large board size can slow down the decision-making process, so this can reduce the board's ability and effectiveness to manage the company and result in deteriorating company performance which can lead to financial distress. However, Bodroastuti (2009), Manzaneque et al (2016) and Mariano et al (2021) found that a large board size can reduce the potential for financial distress.…”

Ownership structure and environmental, social and governance performance disclosure: the moderating role of the board independence

“…Yu et al (2020) took an opposing stance, claiming a positive correlation to the block holder's ownership on disclosure. From the preceding, the block holder may carry a particular agenda that may conflict with the interests of the public of stakeholders (Younas et al, 2021). The block holder may monopolize the information to distinguish it from the rest of the stakeholders.…”