Financial Distress and Corporate Governance: The Impact of Board Configuration

Abstract

The number of filings for bankruptcy procedures has exploded since 2007 and governance has been pointed out as one of the causes. We took a dataset of 312 US firms and asked the following research question: does the board of directors configuration have an impact on financial distress? We used a matched-pair sample of US quoted firms with half of the sample filing for Chapter 7 (liquidation) or 11 (reorganization) of the United States Bankruptcy Code and conducted logit regression analysis. We found that some board size was significantly different for firms that opted for legal protection from those that did not. This study uses corporate governance perspective to analyse the configuration of the board and its impact on a the decision of a company to resort to a bankruptcy protection law. By demonstrating that corporate governance matters in terms of financial distress, this study offers guidance to shareholders and financial institutions. [PUBLICATION ABSTRACT]