The Impact of Corporate Governance on Firm’s Financial Distress: A Case Study of The UK-based firms

Abstract

Purpose: The study aims to assess the potential impacts that the different attributes of corporate governance like the ownership structure and composition of the board on the probability of the listed firms in the UK falling into financial distress. Approach/Methodology/Design: A quantitative methodology with a positivist paradigm and deductive reasoning were employed to collect data from 100 UK-based listed incorporation using FAME-A and BoardEx databases. Moreover, a longitudinal approach was used to collect data from 2014-2019 and sort it into a panel dataset, which was then analyzed using different statistical analysis approaches including pool ordinary least square regression analysis, Pearson’s correlation, and descriptive statistics by using STATA statistical analysis tool. Findings: The findings indicate that certain components of the composition of the board have a substantial effect on a company’s probability to fall into financial distress; for instance, the board size, the board size, board independence, and the independence of the audit committee have a significant negative implication on the selected companies’ probability to fall into financial distress. Similarly, some ownership structure components like institutional ownership and shareholder’s ownership have significant negative implications on the firm’s likelihood of financial distress, while audit committee size and the extent of ownership held by the management show an insignificant implication on the selected companies’ probability to fall into financial distress. Originality/value: The study also highlighted certain limitations and provided recommendations to future researchers to overcome these limitations in the future and reach more informed findings.