TY - JOUR
T1 - Corporate governance and financial distress
T2 - Evidence from Taiwan
AU - Lee, Tsun Siou
AU - Yeh, Yin Hua
PY - 2004/7
Y1 - 2004/7
N2 - Prior empirical evidence supports the wealth expropriation hypothesis that weak corporate governance induced by certain types of ownership structures and board composition tends to result in minority interest expropriation. This in turn reduces corporate value. However, it is still unclear whether corporate financial distress is related to these corporate governance characteristics. To answer this question, we adopt three variables to proxy for corporate governance risk, namely, the percentage of directors occupied by the controlling shareholder, the percentage the controlling shareholders shareholding pledged for bank loans (pledge ratio), and the deviation in control away from the cash flow rights. Binary logistic regressions are then fitted to generate dichotomous prediction models. Taiwanese listed firms, characterised by a high degree of ownership concentration, similar to that in most countries, are used as our empirical samples. The evidence suggests that the three variables mentioned above are positively related to the risk for financial distress in the following year. Generally speaking, firms with weak corporate governance are vulnerable to economic downturns and the probability of falling into financial distress increases.
AB - Prior empirical evidence supports the wealth expropriation hypothesis that weak corporate governance induced by certain types of ownership structures and board composition tends to result in minority interest expropriation. This in turn reduces corporate value. However, it is still unclear whether corporate financial distress is related to these corporate governance characteristics. To answer this question, we adopt three variables to proxy for corporate governance risk, namely, the percentage of directors occupied by the controlling shareholder, the percentage the controlling shareholders shareholding pledged for bank loans (pledge ratio), and the deviation in control away from the cash flow rights. Binary logistic regressions are then fitted to generate dichotomous prediction models. Taiwanese listed firms, characterised by a high degree of ownership concentration, similar to that in most countries, are used as our empirical samples. The evidence suggests that the three variables mentioned above are positively related to the risk for financial distress in the following year. Generally speaking, firms with weak corporate governance are vulnerable to economic downturns and the probability of falling into financial distress increases.
KW - Board composition
KW - Corporate governance
KW - Financial distress
KW - Ownership structure
UR - http://www.scopus.com/inward/record.url?scp=3042774609&partnerID=8YFLogxK
U2 - 10.1111/j.1467-8683.2004.00379.x
DO - 10.1111/j.1467-8683.2004.00379.x
M3 - Review article
AN - SCOPUS:3042774609
SN - 0964-8410
VL - 12
SP - 378
EP - 388
JO - Corporate Governance: An International Review
JF - Corporate Governance: An International Review
IS - 3
ER -