Corporate governance and financial distress : global evidence, macroeconomic governance factors, and distress duration

Abstract

This study examines the impact of corporate governance mechanisms and ownership structures on financial distress through comparative analyses of the global, developed, and emerging market samples. Additional emphasis is given to the effects of macroeconomic governance factors and distress duration on the analyzed relationships. The results are based on a comprehensive sample of 6,539 firms and 49,950 firm-years from 23 developed and 27 emerging countries between 2006 and 2019. Sampling bias and endogeneity concerns are eliminated with detailed tests. The study finds that board size, board independence, CEO duality, ownership concentration, institutional blockholders, and strategic entity blockholders are significant determinants of financial distress, yet their effects differ across markets. Second, additional analyses of board structure show that independent board members have mitigating effects on dual CEO’s distress-increasing actions. Third, the effects of corporate governance and ownership attributes differ under varying levels of macroeconomic governance conditions. Specifically, levels of country investor protection and creditor rights significantly affect the impact of firm-level governance on financial distress. Fourth, distress duration influences the impacts of corporate governance and ownership attributes on financial distress. As firms remain distressed for consecutive years, effects of some governance and ownership variables begin to change, findings validated by the tracing of selected distressed firms.