Corporate Governance as Antecedent of Financial Distress: Case Study of Textile Industry of Pakistan

Abstract

Purpose: The present research studies the effect of corporate governance practices on the level of financial distress of the Textile companies listed at PSX.  Design/Methodology: Data from 2019 to 2022 from a sample of 43 companies operating in the weaving, spinning and composite textile industry was assessed in the study. Regression analysis was used to predict the impact of board independence, board size, audit committee independence and duality in the role of CEO and chairman on the financial distress. Findings: The findings reveal that board independence, board size and the duality in the role of Chairman and CEO impacts the financial distress level of the companies and that in companies wherein governance structure is strong, the likelihood of financial distress is lower. However, the effect of Audit committee independence is found to be insignificant in this study. Originality: This study provides support to the companies in understanding the importance of governance structure and its significance in reducing financial distress level. The findings of the study will be of value to the companies operating in textile sector by enabling them to strengthen their governance structure to address the financial distress situation. Further, this study will help the regulators in drafting the governance requirements for the companies and also educating them about the importance of the latter. In future, other studies using different proxies of corporate governance like gender diversity in the board, number  of board meetings and characteristics of audit committee may be conducted..