Corporate Governance and the Insolvency Risk: Evidence from Bahrain

Abstract

The purpose of this study is to examine the impact of corporate governance (CG) mechanisms on the likelihood of firms having high, low, or moderate insolvency risk. Due to the trichotomous categorical nature of the dependent variable, the multinomial logistic regression analysis is used to determine the impact of CG mechanisms on the firms' insolvency risk. Board structure and audit committee structure are used as attributes of CG, while the Altman Z-Score is used as a measure of insolvency risk. The results show that CG mechanisms, namely, the board size, audit committee size, and audit committee meetings have a significant impact on the firms' insolvency risk. However, board meetings, board independence, and audit committee independence do not have any significant impact on insolvency risk. The findings of this study could provide awareness to managers on the relationship between the CG of the firm and the insolvency risk, with respect to Bahraini firms, which could assist them in assessing the probability of insolvency. This study could also be useful from the policy perspective for firms to take necessary measures and precautions to avoid financial distress and extend the continuity of the company by constructing long-term strategies to enhance the CG structure.