Corporate Governance and Financial Distress: Evidence from Taiwan
Date Issued
2002-05-02
Date
2002-05-02
Author(s)
Yeh, Yin-Hua
DOI
20060927122731523921
Abstract
Prior empirical evidence supports the wealth expropriation hypothesis that the
controlling shareholder(s) tend to expropriate minority interests, which in turn reduces
corporate value. However, it is still unclear whether corporate financial distress is related to
this type of expropriative behavior. To answer this question, we adopt three variables to proxy
for the risk of expropriation by the controlling shareholder, namely, the percentage of
directors occupied by the controlling shareholder, the percentage the controlling shareholders
shareholding pledged for bank loans （pledge ratio ）, and the deviation of control away from
cash follow rights. Binary logistic regressions are then fitted to generate dichotomous
prediction models. Taiwanese listed firms, characterized by a high degree of ownership
concentration similar to that in most countries, are used as our empirical samples. The
evidence suggests that the three variables mentioned above are positively related to the risk of
financial distress, even after controlling for the possible influence of financial performance. It
is also found that corporate governance deteriorates a year before the financial distress occurs.
Generally speaking, firms with weak corporate governance are vulnerable to economic
downturns and the probability of falling into financial distress increases when corporate
governance deteriorates. An immediate implication follows that any early warning system
cannot be complete without incorporating corporate governance variables.
Publisher
臺北市:國立臺灣大學財務金融學系
Type
report
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