Financial Distress and Corporate Governance around Lehman Brothers Bankruptcy

Abstract

United States faced a growing number of corporate bankruptcies during the subprime crisis. This article is intended to determine the effectiveness of some governance mechanisms on the financial distress probability of companies over the period 2007–2009. This period is divided into two parts; we take the date of filing for chapter 11 of the company Lehman Brothers (15 December, 2008) as the cutting point between the mortgage and the financial phases of the crisis. Aiming to highlight the influence of corporate governance mechanisms on financial distress probability, we then use, for each sub period, logit models on paired samples of firms which half opted for legal protection due to financial and commercial difficulties. Our results indicate that, during the first sub period, combining the functions of CEO and chairman of the board of directors is beneficial to the survival of the firm, whereas, during the second sub period, capital ownership by the CEO appears to be an incentive to keep the firm on float. This paper seeks to add to the corporate governance literature by considering how certain corporate governance mechanisms impacted the perennity of companies during the subprime crisis.