Corporate governance and financial distress: Evidence from Taiwan

Tsun Siou Lee, Yin-Hua Yeh*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

146 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)378-388
Number of pages11
JournalCorporate Governance: An International Review
Volume12
Issue number3
DOIs
StatePublished - 1 Jan 2004

Keywords

  • Board composition
  • Corporate governance
  • Financial distress
  • Ownership structure

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