Can we predict the likelihood of financial distress in companies from their corporate governance and borrowing?

Mariano, Sara Sofia Gomes; Izadi, Javad; Pratt, Maurice

doi:10.1108/ijaim-08-2020-0130

Cited by 36 publications

(87 citation statements)

References 52 publications

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“…Companies with concentrated ownership will be followed by high controlling rights by the controlling shareholder, where this controlling right can affect the company's performance and minimize the possibility of the company experiencing financial distress (Wang & Deng, 2006;Mariano, Izadi & Pratt, 2021). In the situation of company failure, the controlling shareholders will suffer huge losses due to their participation in the company.…”

Section: The Effect Of Concentrated Ownership On the Likelihood Of Financial Distressmentioning

confidence: 99%

“…In the situation of company failure, the controlling shareholders will suffer huge losses due to their participation in the company. Thus, controlling shareholders will monitor management behavior to prevent opportunism, or in other words, controlling shareholders have incentives to monitor management and prevent conflicts of interest that can cause harm to the company (Mariano et al, 2021).…”

Section: The Effect Of Concentrated Ownership On the Likelihood Of Financial Distressmentioning

confidence: 99%

“…Based on the research by Wang and Deng (2006) and Mariano et al (2021), controlling shareholders will have more incentives to monitor management behavior because their participation or investment in the company is quite significant. In accordance with the agency theory of Jensen and Meckling (1976), the supervision carried out by the controlling shareholder is an example of monitoring cost.…”

Section: The Effect Of Concentrated Ownership On the Likelihood Of Financial Distressmentioning

confidence: 99%

“…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. According to Manzaneque et al (2016) and Mariano et al (2021), a greater number of board members will be able to provide greater benefits and have wider connections to provide more resources to help the company.…”

Section: The Effect Of Independent Commissioner On the Likelihood Of Financial Distressmentioning

confidence: 99%

“…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. According to Manzaneque et al (2016) and Mariano et al (2021), a greater number of board members will be able to provide greater benefits and have wider connections to provide more resources to help the company. This statement is in accordance with the resource dependence theory developed by Pfeffer and Salancik (1978) which implies that a larger board size can provide more benefits and advantages to the company, especially during difficult times.…”

Section: The Effect Of Independent Commissioner On the Likelihood Of Financial Distressmentioning

confidence: 99%

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

Jodjana¹,

Nathaniel²,

Rinaningsih³

et al. 2021

JAI

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Research aims: This study aims to examine the effect of corporate governance, specifically relating to the ownership structure and board structure, on the possibility of financial distress.Design/Methodology/Approach: The sample used in this study are companies listed on the Indonesia Stock Exchange (IDX) from 2015 to 2019, excluding the financial industry. Conditional logistic regression is used as the study uses paired data based on the total assets of the company.Research findings: The results of this study indicate that board ownership, independent commissioners, and the board of directors can increase the likelihood of financial distress. On the other hand, institutional ownership and concentrated ownership are proven to have no effect on the likelihood of financial distress. The results of sensitivity testing using logistic regression showed different results on the variable institutional ownership, which is that institutional ownership can increase the likelihood of financial distress. Meanwhile, the other variables showed the same outcome as the main regression used in this study.Theoretical contribution/Originality: This study contributes to the knowledge on the relationship of board ownership, institutional ownership, concentrated ownership, independent commissioners and board size and the possibility of financial distress. Also, this research found that the provision of incentives in the form of shares to the board may not be an effective way to overcome financial distress in Indonesian firms.

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Section: The Effect Of Concentrated Ownership On the Likelihood Of Financial Distressmentioning

confidence: 99%

Section: The Effect Of Concentrated Ownership On the Likelihood Of Financial Distressmentioning

confidence: 99%

Section: The Effect Of Concentrated Ownership On the Likelihood Of Financial Distressmentioning

confidence: 99%

Section: The Effect Of Independent Commissioner On the Likelihood Of Financial Distressmentioning

confidence: 99%

Section: The Effect Of Independent Commissioner On the Likelihood Of Financial Distressmentioning

confidence: 99%

See 3 more Smart Citations

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

Jodjana¹,

Nathaniel²,

Rinaningsih³

et al. 2021

JAI

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Corporate governance and financial distress: A review of the theoretical and empirical literature

2022

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This study comprehensively reviews the theoretical and empirical literature on the relationship between corporate governance and financial distress and provides future research directions. We follow several different approaches by identifying, reviewing, and classifying related articles during the period 1985 to 2021. We used a set of keywords that included a combination of different terms of corporate governance and financial distress. Our review indicates that the majority of the studies based their arguments considering a single theory. The generalizability of different results in less explored countries is a serious concern and the one‐size‐fits‐all approach does not apply to the corporate governance‐financial distress relationship. Several different theories and confounding factors need consideration when examining the relationship between corporate governance and financial distress. Our review highlights future avenues by suggesting that studies should consider different governance attributes and test those factors in different and diverse contexts. Our review of the literature provides implications for academics and practitioners.

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Accounting‐based variables as an early warning indicator of financial distress in crisis and non‐crisis periods

Powell

Dinh

et al. 2023

Int. J Fin Econ

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Financial integration in the Association of Southeast Asian Nations (ASEAN) region is a key focus of the ASEAN Economic Community. Whereas many studies focus on modelling corporate default, this paper identifies early warning indicators of financial distress before a default, using multiple discriminant analysis (MDA) models with a sample of listed and delisted companies in the ASEAN region. The analysis examines 720 companies in 10 different industries across six ASEAN countries from 1997 to 2016. The study constructs individual models for each country as well as an overall model for the entire region, using both in‐sample and out‐of‐sample approaches. This overall model could be useful for an integrated banking system. To ensure robustness, the study also separately examines the predictive performance of the MDA models across different economic crises: the Asian financial crisis (AFC) from 1997 to 2000, the global financial crisis (GFC) from 2007 to 2009 and their pre‐ and post‐crisis periods. We find that profitability ratios are the best indicators of financial distress in the ASEAN region, followed by liquidity and leverage ratios. In addition, our findings reveal common indicators that can be used to predict financial distress across ASEAN countries. The single model performs reasonably well in predicting financial distress 1 year ahead. In addition, the model is extended to incorporate a market‐based indicator into the MDA models, the distance to default. However, the inclusion of this indicator does not significantly improve the accuracy of the models in predicting financial distress at listed firms in the ASEAN region.

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Can we predict the likelihood of financial distress in companies from their corporate governance and borrowing?

Cited by 36 publications

References 52 publications

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

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

Corporate governance and financial distress: A review of the theoretical and empirical literature

Accounting‐based variables as an early warning indicator of financial distress in crisis and non‐crisis periods

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