The Influence Of Corporate Governance Feature On Financial Distress

Study on financial distress began in1960s. However, most of these researches wasconcerned with financial ratios. Due to the hysteresis quality of accountinginformation announcement and accounting data likely controlled by opportunistsmanagement, study on financial distress only based on accounting information isimproper. So the research conclusion has some limitation.With the development of modern enterprise system and much more understandingabout the importance of corporate governance mechanism, people begin to pay closeattention to the effect of corporate governance on financial distress. Related literaturehave shown that corporate governance structure is the foundamental cause of financialdistress. At present, study on financial distress based on corporate governance mainlyconcentrates on ownership structure, the board of directors and executive committee.Ownership structure and the board of directors can not only effect the power balanceamong excessive executive and shareholder directly, but also effect the benefits ofcorporate governance mechanism. What is more, ownership structure as well as theboard of directors can indirectly reflect financial status and future performance.Therefore, this paper analyzes the effect of ownership structure and the board ofdirectors on financial distress. This paper add two new variables which include topthree directors’ reward and independent directors’ allowance in the model for the firsttime.This paper takes the ST companies in2011as financial distress research sample andchooses NOT-ST companies as control group which are selected by the principle, thisis coming from the same industry and similar total assets. Based on the theoreticalanalysis, this paper puts forward test hypotheses from ownership structure and theboard of directors. Financial distress, a induced variable, is a two-valued variable, sothis thesis designs a Logistic model. This research finds that there is significantdifference about ownership structure and the board of directors between financialdistress companies and healthy companies.The empirical study about financial distress shows：(1) State-owned Share-holdingrate is significantly positive correlated with the probability of financial distress.(2)Equity restriction is significantly positive correlated with the probability offinancial distress.(3)The number of directors is significantly positive correlated withthe probability of financial distress.(4)Shareholding ratio of the top management is significantly negative correlated with the probability of financial distress.(5)Shareholding ratio of the chairman of the board is significantly negative correlatedwith the probability of financial distress.(6)Ownership concentration isinsignificantly negative correlated with the probability of financial distress.(7)Whether the chairman of the board is CEO is insignificantly negative correlatedwith the probability of financial distress.(8)The proportion of independent directors isinsignificantly negative correlated with the probability of financial distress.(9)Theallowance of independent directors is insignificantly negative correlated with theprobability of financial distress.(10)The reward of top three directors is significantlynegative correlated with the probability of financial distress.(11)The controllingshareholders proportion is significantly negative correlated with the probability offinancial distress.Finally, based on the result of empirical study and the actual circumstance of thelisted company in China, this paper offers some suggestions in order to avoidfinancial distress, such as optimizing share-holding structure and improving thegovernance efficiency of the board of directors.