Study On The Relationship Of Financial Distress And Corporate Governance Of Chinese Listed Companies

Financial distress Prediction is an important field in Finance,Since 1960s, more and more researchers try to predict bankruptcy through quantitative analysis. In the recent 50 years, many models such as Multivariate Discriminant Analysis and Neural Network come out, and a lot of results are reached. In our country, since the Accountant Rule is uniformed after July 1, 1993, the early warning systems using accounting information are more and more. However, as a firm's financial report can be subject to management manipulation, important information can be covered by the manager, which brings a certain difficult for investors in judging the firm's performance fairly. Thus, we incorporate the governance variables into the early warning systems to counterpart the shortcomings of models that financial ratios included only.As a result, this study will attempt to incorporate the ownship structure and corporate governance variables into an investigation of financially distressed firms, with the purpose of capturing the impact of such variables on a firm's performance. This paper intends to discover the best method in forcasting financial distress, and help the regulators and investors to identify the firm's financial distress status.This study regards public companies which received special treatment as a signal of financial distress, and tries to predict financial failure of public companies in China. After using financial ratios and governance variables as explanatory variables respectively, this paper gives empirical results through Logistic regression. The findings indicate that corporate governance structure and ownship structure are siginificantly correlated with the financial distress probability, and the model that incorporate governance variables fits the data better than the model that incorporate financial ratios only. Amongst the variables, managerial ownship exerts great influence on the financial distress, so does the CEO duality. Although others are not statistically significant, their expected sign also show that a big board size and a low proportion of outside directors are not good for a company's performance. These results indicate that it is very important to build an effective governance mechanism so as to prevent the occurrence of financial distress.