Abstract
The number of filings for bankruptcy procedures has exploded since 2007 and governance has been pointed out as one of the causes. We took a dataset of 312 US firms and asked the following research question: does the board of directors configuration have an impact on financial distress? We used a matched-pair sample of US quoted firms with half of the sample filing for Chapter 7 (liquidation) or 11 (reorganization) of the United States Bankruptcy Code and conducted logit regression analysis. We found that some board size was significantly different for firms that opted for legal protection from those that did not. This study uses corporate governance perspective to analyse the configuration of the board and its impact on a the decision of a company to resort to a bankruptcy protection law. By demonstrating that corporate governance matters in terms of financial distress, this study offers guidance to shareholders and financial institutions.
Highlights
In today’s business, resorting to a bankruptcy protection law is a common occurrence among U.S corporations of all sizes and in all sectors (Altman, 1999)
This study contributes to corporate governance literature by examining the role of board configuration on the occurrence of financial distress event
Our results indicate that the inclusion of corporate governance variables improves the model
Summary
In today’s business, resorting to a bankruptcy protection law is a common occurrence among U.S corporations of all sizes and in all sectors (Altman, 1999). From the late 1980s through to the mid-1990s, some authors (Hambrick & D’Aveni, 1988, 1992; Gilson, 1990; Daily & Dalton, 1994; Gales & Kesner, 1994) started to investigate the link between financial distress and corporate governance. Results of these studies confirm that corporate governance variables significantly improve the predictive power of widely used bankruptcy forecast models. A study by Erkens, Hung and Matos (2010) notably reports that firms with a higher proportion of independent directors on the board performed worse during the 2007–2008 period
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