Corporate governance and corporate failure : a survival analysis

Abstract

Corporate governance provides the structure through which the objectives of the company are set, and means of attaining those objectives and monitoring performance are determined, With the introduction of corporate govemance rules in 2008, awareness was created among the Sri Lankan organizations. The research was carried out with the objective of identifying the relationship between survival likelihood of the distressed firms with certain corporate governance characteristics and financial indicators, to check the significance of these characters and to examine the nature of the relationship of these characters with the financial distress. Outside directors, CEO change" creditor ownership, block holder ownership and board size were selected as the corporate governance characteristics. As financial variables financial risk, interest coverage ratio, operating risk, size, liquidity, profitability and market perception were selected. Analysis was carried out by using multiple regression. t-test and F test is used to identify the significance of the factors used for the study. Conclusions of the research were that there is a relationship between the survival likelihood of financially distressed nature of firms and the corporate governance characteristics and the financial indicators. Board size and out side directors of the assets do not show significance even though these factors show relation ship with the financial distress. CEO change, creditor involvement, block holder ownership financial risk, interest coverage ratio, operating risk, size, liquidity, profitability and market perception show significance with survival likelihood of financially distressed firms. CEO change, financial risk, interest coverage ratio and market perception show positive relationship with financial distress. Liquidity, profitability, block holder owner ship and creditor involvement are negatively associated with financial distress. Profitability shows the capability of predicting the financial distress of the firms. Use of hazard ratio is not confirmed in forecasting the magnitude of bankruptcy.