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We examine how firm characteristics, particularly the degree of firm complexity and the firm’s need for specialty knowledge, affect the relationship between corporate governance and the risk of bankruptcy. We find that having larger boards reduces the risk of bankruptcy only for complex firms. Our results also suggest that the proportion of inside directors on the board is inversely associated with the risk of bankruptcy in firms that require more specialist knowledge and that the reverse is true in technically unsophisticated firms. The results further reveal that the additional explanatory power from corporate governance variables becomes stronger as the time to bankruptcy is increased, implying that although corporate governance variables are important predictors, governance changes are likely to be too late to save a firm on the verge of bankruptcy.

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We examine the impact that various financial and industry variables have on credit ratings issued for Australian firms by Standard and Poor's. Our ordered probit model indicates that interest coverage and leverage ratios have the most pronounced effect on credit ratings. Profitability variables and industry concentration measures are also important. Financial variables are helpful in discriminating between A-and BBB-rated firms, but are less precise in separating AA-and A-rated firms. We also document a consistent trend towards lower ratings-the standard required to achieve a particular rating is increasing over time.