Internal governance mechanism and default probability: evidence from US public firms

Abstract

Using a sample of US public firms, we examine the role of different internal corporate governance mechanisms in predicting the probability of default. We build a model that integrates financial ratios and corporate governance-related variables to predict the probability of default and find that board of directors-related variables increase the power of the model to predict the default probability. Our results suggest that firms with larger boards and CEOs performing multiple functions within their corporations are associated with lower default probability. However, CEO-chairman duality and the number of internal directors increase the credit risk. Our parsimonious model also shows the importance of board of directors' characteristics for predicting the probability of default in public firms.