Does compliance with corporate governance codes help to mitigate financial distress?

Abstract

This paper analyzes whether the compliance with corporate governance codes helps to mitigate the financial distress of firms. We examine three different levels of compliance: overall compliance, the compliance with the recommendations regarding the board of directors and the compliance with the recommendations on board subcommittees. Our results reveal that only the fulfillment with the recommendations about the board of directors leads to a reduction in the likelihood of financial distress. These findings extend the academic debate concerning the role of governance codes and their impact on firm outcomes, and have practical implications for both professionals and firms. Moreover, our findings emphasize the need to distinguish between the different types of recommendations to investigate the effects of these codes. In addition, the results can be useful for policymakers in the configuration of new requirements and recommendations regarding corporate governance structures. Furthermore, our results contribute to the literature, delving into the determinants of the financial distress of firms.