Corporate Governance and Financial Distress: Evidence from Chinese Listed Companies

Abstract

We investigate the relationship between corporate governance characteristics and the risk of financial distress in the context of the Chinese transitional economy. Using a sample of ninety-six financially distressed companies and ninety-six healthy companies, we find that large shareholder ownership, state ownership, and the proportion of independent directors are negatively associated with the probability of distress. Additionally, managerial agency costs are badly detrimental to a company's financial status. However, the degree of balanced ownership, managerial ownership, board size, and CEO duality do not significantly affect the probability of default. Furthermore, we test the influence of state-controlling right by subgrouping the sample into state-controlled and non-state-controlled companies. The results indicate that corporate-governance attributes act differently on the status of financial distress between the two subsamples.