Empirical Research On The Impact Of Internal Governance Of Listed Companies In China On Financial Distress Cost

Following the globalization of the economic, the competition of the market ismore serious, numbers of the company in financial distress increased steadily.Especially, the financial crisis of the world in2008lead to a great affection to thestability of the macro financial system, more and more companies, especially, theinternational large-scale group companies get into the financial distress, even gobankrupt. Some relevant research suggest that the companies’ operation, the creditrating companies’ credit and the economic development of the country suffered morefrom the financial distress and the bankrupt(Altman，1984；Andrade、Kaplan，1998).This evidence was supported by the capital market of China. First, the companywhich get into financial distress would suffer more and more. Li Bingchen(2004)findthe average asset of listed company in China during the year when the company withspecial treatment is amount to67.52%of the second year before the company underspecial treatment, namely, reduced by32.48%. Second, stakeholder suffer more fromthe financial distress, the average equity of listed company in China during the yearwhen the company with special treatment is amount to24.84%of the second yearbefore the company under special treatment. Otherwise, Wu Shinong and ZhangZhiwang（2005）find that during the year which company under financial distress, themarket value of equity reduced by2.04%, on average, investor imposed financialdistress cost rate by about2.04%. So, the cost incurred by the financial distress is cannot be neglected, the efficiency of the capital market will seriously influenced by thehigh financial distress cost.Using a data set on financial distress of166non-financial firms under specialtreatment from China during the2004-2009period. This paper use the negativeexchange ratio of operation performance as the proxy for the financial distress cost,and examine the influence of the inner governance mechanism to the financial distresscost. This paper divided into six parts: the fist segment is introduction. This segmentdetails the background, meaning, and the conceptual refinement about the financialdistress and the financial distress cost. The second segment review the relevantliterature about the financial distress cost from four aspect: the relationship betweenfinancial distress and company’s performance, the measurement of the financialdistress cost, the relevant research about corporate governance and the relevantresearch about de influence factor about the financial distress cost. The third segmentis theory analysis and research hypothesis. This paper discuss the influence tofinancial distress from ownership structure, the characteristics about the board of director and the executive compensation, then we proposed some hypotheses. Thefourth segment is research design. We defined relevant variable and proposed themodel. The fifth segment is positive analysis. We analyze the sample by thedescriptive statistics, univariate statistic and multivariate statistical analysis. The sixthsegment is conclusion, shortage and future research. We conclude the whole paper,point out the shortage and suggest some future research aspect. This paper find thatthe size of the board is significant higher for the companies with a lower financialdistress cost. The number of independent director, the proportion of big shareholderand the executive compensation is higher for the companies with a higher financialdistress cost. Whether the company which get into the financial distress would get outtimely is depend on the efficiency of corporate governance. If a company have a goodcorporate governance, the company with poor performance and financial distresswould feedback more timely, then, it can take some comprehensive and timelycountermeasures to offset the loss, and reduce the financial distress cost by the biggestextent.