Analysis of Corporate Governance Effects on Bankruptcy Risk: Report

This report investigates the relationship between corporate governance and corporate bankruptcy risk through a comprehensive literature review. It examines various journal articles, comparing and contrasting the views of different authors on the subject, and providing a focused discussion on the key arguments. The report analyzes methodologies used in research papers, critically evaluating their aspects and identifying research gaps. It highlights the influence of managing directors and board independence on financial stability, as well as the impact of corporate social responsibility and shareholder rights. The report concludes by summarizing the findings and suggesting implications for future research on the topic, offering valuable insights into the complex interplay between governance structures and financial risk.

Running head: CORPORATE GOVERNANCE AFFECTS CORPORATE BANKRUPTCY
RISK
Corporate governance affects corporate bankruptcy risk
Name of the Student
Name of the University
Author Note

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Executive summary:
The report is prepared for identifying the association between corporate governance and
corporate governance risk by literature review and researching literature associated with the
topic concerned. Brief summaries of literature review from different articles have been
discussed in the report. View of different authors on issues are compared and contrasted by
analyzing the journal articles. Critical reviews of arguments presented by different authors
have also been demonstrated in the report. Moreover, report also demonstrates the critical
view of aspects of methodologies used in different research paper. The gaps or questions that
have been left unanswered in the research paper have been explained in terms of research
gap. The conclusion part of report depicts what researchers have arrived or concluded by
undertaking the research. Implication of research for further carrying out research work on
topic is also explained. Articles for the purpose of analysis have been analyzed by selecting
articles from different sources.

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Table of Contents
Introduction:...............................................................................................................................3
Background of topic:..................................................................................................................3
Main objective of report:............................................................................................................3
Findings summary from literature review:.................................................................................3
Discussion:.................................................................................................................................4
Focused discussion on topic with logical arguments and Comparing and contrasting views of
different authors:........................................................................................................................4
Criticizing aspects of methodologies used:................................................................................6
Identification of gaps in literature review:.................................................................................8
Conclusion:................................................................................................................................8
References list:...........................................................................................................................9

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Introduction:
Background of topic:
Corporate governance and corporate bankruptcy risk are interrelated to each other and
in recent years, considerable attention has been given on corporate governance. Some of the
previous studies have reasoned that there is noteworthy distinction between bankruptcy
profitability as well as corporate governance. For bankruptcy, no distinguished word has been
established and it is described as decrease in profitability power of company to make
repayment of main debt and interest rate. The literature review on the topic concerned is
provided by thesis with empirical results and theoretical foundations. Many issues
surrounding the bankruptcy and corporate governance are still not resolved and this provides
abundant of opportunities for conducting further research. One of the factors that are of
increasing importance to corporate governance is prediction of bankruptcy.
Main objective of report:
The main purpose of preparing report is to ascertain the significant relation between
bankruptcy profitability and corporate governance. Analysis of relationship is done by
viewing journal articles for supporting the arguments that are presented.
Findings summary from literature review:
The findings concerning association between bankruptcy risk and corporate
governance depicts that occurrence of fiscal crisis probability is decreased by the influence of
managing director. However, the features of corporate governance do not considerably
influence the occurrence of bankruptcy and financial crisis. It has been concluded that
internal control of company is influenced by managing director that help in preventing the
bankruptcy and financial occurrence (Dittmar and Duchin 2015). Moreover, it has also been
proved that financial conditions of organization and independence of boards of directors are
significantly related to each other. It is concluded by such findings that there were less
unbound members in the board of directors of the companies who had faced financial risks
(Akbar et al. 2016). Furthermore, it has been analyzed in an article, the relationship between
risk of bankruptcy and corporate governance is explained by firms need for specialty
knowledge and degree of complexities of firms. It has been suggested by the findings from
research that risk of firm’s bankruptcy is inversely related with inside director proportion on

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board. An organization having better operating performance with strong governance implies
that firms are less likely to fail if they have strong shareholder governance (Biddle et al.
2016).
Discussion:
Focused discussion on topic with logical arguments and Comparing and contrasting
views of different authors:
In this particular section, various arguments concerning the topic are supported by
reviewing the journal articles.
An article on “corporate governance indicators and financial ratios in bankruptcy
predictions” highlights the examination of financial ratios and corporate governance
indicators. Most important feature in the study involves ownership and board structures,
profitability, and solvency in financial ratios. The most important features in the bankruptcy
prediction are corporate governance indicators categories of ownership and board structures
(Dixon et al. 2015). However, the findings are not applicable in some markets when there are
no obvious corporate governance indicators characteristics.
Another article post bankruptcy reorganization performance and corporate governance
is based on agency theory. Study is conducted for ascertaining the function of mechanism of
corporate governance in determining the post bankruptcy firm performance. It is indicated by
the findings from the research conducted that significant determinants of post bankruptcy
performance of firm are monitoring and incentive mechanisms. Ownership concentration is
the key monitoring mechanisms that are measured by shares held by largest shareholder of
organization (Gsmi-ijgb.com 2018). It is indicated by results that such mechanisms and help
in increasing performance post bankruptcy can mitigate agency problems in insolvent
companies.
In an article named does good corporate governance reduces credit risk, the objective
of the study is to have a deeper understanding on debt holder and shareholder relationships
and expanding the role of corporate governance in organizations. It has been found from the
analysis that companies having or providing shareholders with the strongest rights tends to
have higher debt financing costs. On other hand, shareholders having weaker rights have
considerably lower risks to lower cost of debts and debt holders.

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An article from Mohamed Saleh Darweesh about correlations between market value,
financial performance and corporate governance depicts that common cause of failure among
firms are poor corporate governance and weak internal control. Various cases of corporate
mismanagement and financial scandals have brought increasing attention on rules and
regulation of corporate governance in association with issues of business ethics. Financial
crisis and financial scandals in the organizations results in enhancing and strengthening
regulation and rules of corporate governance. For contemporary business environment,
system of corporate governance is considered important because conflict of interest between
stakeholders and firms manager cannot be mitigated by legislations, economic theories and
accounting standard (Cao et al. 2017). Findings generated from study depicts that a corporate
governance model can be build by corporate governance that would help in protecting the
rights of stakeholders and maximization of value of companies (Gherghina et al. 2014).
A journal article extracted from eco.journals.com deals with the investigation on
empirical relationship between firm value and ratings of corporate governance. It was found
from the development of hypothesis in the article that empirical relationship between firm
value and developed corporate governance ratings was not statistically validated (Haan and
Vlahu 2016).
An article extracted from emeraldinsight.com is determining how the financial risk of
firms is associated with corporate social responsibility. Research purpose was intended to
examine whether firms who are socially responsible are different in terms of financial risks. It
was found from the analysis that firms who are socially responsible have better performance
in relation to credit ratings and in terms of distance to default. The findings of article
demonstrate the significance of considering both negative and positive company performance
(Cust.edu.pk 2018).
Journal article published and extracted from journal of finance, accounting and
management by Aly Salama, Lijuan Xiao and Robert Dixon intend to analyze the relationship
between earning management and corporate governance. Two aspects of the article that was
focused on this article were on supervisory directors in constraining the earning manipulation
and supervisory directors (Revilla et al. 2016). It was found that introduction of board of
directors in the organization as an imperative corporate governance element for aligning the
interest of managers and shareholders that helps in reducing agency cost that stems from
control and ownership separation. Some authors that outside directors as against inside

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directors could more effectively manage the management claimed it. The reason is
attributable to the fact that outside directors have greater incentive for maintaining their
reputation capital (Gherghina et al. 2014). On other hand, it was identified by establishing the
relationship between bankruptcy and corporate governance that managing director influences
decrease in financial crisis. While the occurrence of probability of financial crisis have not
been considerably impacted by other features of corporate governance. It has been concluded
that internal control system of company is impacted by influence of managing directors that
would help in preventing the occurrence of bankruptcy and financial disorder.
In an article extracted from emeraldinsight.com on the corporate governance impacts
on financial distress and financial performance by Tamer Mohamed Shahwan. The purpose
of article is to empirically observe the quality of practices of corporate governance on the
companies listed in Egypt and impact of practices of corporate governance on financial
suffering and overall financial performance of organization. It has been ascertained from the
analysis that corporate governance practice within such organizations are relatively low and
no positive association was found between likelihood of financial distress and practices of
corporate governance.
One of the articles extracted from sciencedirect.com that involves conducting more
research on performance of firms and corporate governance. It was found in the study that
organizations complying with regulations of corporate governance are not a determinant for
influencing corporate performance. Earlier research on positive relationship between
performance of firms and corporate governance may be prejudiced and the potential
endogeneity might not be controlled by them (Gsmi-ijgb.com 2018).
Criticizing aspects of methodologies used:
In an article where the purpose of author was to investigate the systematic correlation
of the likelihood of corporate default with governance provisions that helps in determining
the balance between managers and shareholders. Empirical analysis in this particular article
has been performed by examination of governance rules that are used as proxy for power of
management in relation to shareholders and are associated with financial distress risk
measurement that is Ohlson’s O score and Altman Z score (Helda.helsinki.fi 2018).
Moreover, author used a general logistic regression model for examining the impact of
corporate governance rules on corporate default probability. Such model represents default of
firms as operating performances, governance functions, characteristic of assets and financial

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state. Risk factor that is used for the analysis purpose involves the proxy for sharing
relationship managers and shareholders. Important predictors for corporate default are
accounting a ratio that helps in measurement of financial structure and operating
performances.
The measurement used in an article intending to examine the relationship between
bankruptcy profitability and corporate governance indexes make use of several variable and
measurement method. Logit model is used for measuring the bankruptcy risks and the
possession for the size of board of directors is measured by using Herfindal-Herishman index
(Oikonomou et al. 2014). Findings generated from study depicts that there is a noteworthy
and direct relationship between bankruptcy and directors at board.
The methodology used by authors in determining the association of corporate social
responsibility with the firm’s financial hazard is KLD social performance rating scores. Such
scores are used for measuring the performance of corporate social responsibility (Drover et
al. 2017). Monthly consensus earnings forecast for obtained by authors from data stream
database.
The methodology used by author in assessing the relationship between financial
performance and corporate governance, a corporate governance index is constructed in the
current study. Such index comprise of four elements such as rights of shareholders and
relations of investors, transparency and disclosure, composition of directors at board, control
and structure of ownership. Sample taken on non-financial firms forms the basis of assessing
the practices of corporate governance on the financial performance (Shahwan 2015).
Moreover, Tobin’s q is used for assessing the corporate performance. At the same time, the
indicator used for measuring financial distress is Altman Z score. It is deduced that if the z
score is bigger, then risk of financial hazard would be smaller (Christensen et al. 2017).
Methodology used in examination of relationship between performance of firms and
corporate governance compliance is implementation of robust technology that is generalized
method of moment’s estimation. Governance index was developed for the purpose of
investigation of impact on corporate performance (Ararat et al. 2017). Findings of research
are based on generalized method of moment’s estimation that helps in controlling the effects
of dynamic endogeneity and unobservable heterogeneity.

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Identification of gaps in literature review:
While analyzing the articles for assessing the relationship between corporate
performance and corporate bankruptcy risk, gaps in research was identified in terms of
unavailability of data on the variables for considerable period. In addition to this, there was
no clear disclosure of the distinction between independent non-executive and executive
directors made by listed companies. This made it very difficult for researcher to determine
the proportion of independent directors among executive directors.
Research gap was also identified in terms of extraction of data from one or two
sources. The gaps identified in the analysis had to be filled from estimated or other sources
using several ratios. It is therefore indicative of the fact that data has not been sourced
uniformly and hence there have been issues of uniformity. Some of accounting non-
compliance had also contributed to creation of accounting biases. Results ascertained by
conducting research might be skewed due to searching of data from more than one source
because intentions and data integrity forms the basis of data using data sources (Berger et al.
2016).
Conclusion:
Analysis of several research paper on identification of relationship between corporate
governance and corporate bankruptcy risk have provided with mixed results. Some papers
have concluded that there is positive interrelationship between corporate finance and
corporate governance. While some other research paper concluded that, there exist somewhat
negative relationship between practices of corporate governance and corporate performance.
Nevertheless, analysis of research work has contributed to new knowledge in several ways.
Firstly, researcher will be provided a comprehensive platform for conducting comprehensive
investigations on the relationship between leverage, ownership concentration and value of
firms. Furthermore, findings generated from articles might helps in suggesting variables that
would be given priority in making policy for corporate decision-making. The potential
interaction that might exist between leverage and ownership concentration can also be
investigated with the help of study. Some of the research area requires empirical work and
string conceptualization that would leave many opportunities for conducting future studies.
Lastly, credit risk of banks is not explained by factors of corporate governance. Therefore,
many researchers have added the factor of corporate governance in test and risk equation for

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determining whether the corporate governance factors influences risk level of banks and
relationship between risk and bank’s capital.

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References list:
Akbar, S., Poletti-Hughes, J., El-Faitouri, R. and Shah, S.Z.A., 2016. More on the
relationship between corporate governance and firm performance in the UK: Evidence from
the application of generalized method of moments estimation. Research in International
Business and Finance, 38, pp.417-429.
Ararat, M., Black, B.S. and Yurtoglu, B.B., 2017. The effect of corporate governance on firm
value and profitability: Time-series evidence from Turkey. Emerging Markets Review, 30,
pp.113-132.
Berger, A.N., Imbierowicz, B. and Rauch, C., 2016. The roles of corporate governance in
bank failures during the recent financial crisis. Journal of Money, Credit and Banking, 48(4),
pp.729-770.
Biddle, G.C., Ma, M.L. and Song, F.M., 2016. Accounting conservatism and bankruptcy risk.
Cao, Z., Leng, F., Feroz, E.H. and Davalos, S.V., 2015. Corporate governance and default
risk of firms cited in the SEC’s Accounting and Auditing Enforcement Releases. Review of
Quantitative Finance and Accounting, 44(1), pp.113-138.
Christensen, J., Kent, P., Routledge, J. and Stewart, J., 2015. Do corporate governance
recommendations improve the performance and accountability of small listed
companies?. Accounting & Finance, 55(1), pp.133-164.
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https://www.cust.edu.pk/ms_thesis/UploadedFiles/Syed%20Basharat%20Hussain%20Shah
%20-MMS151042.pdf [Accessed 19 Mar. 2018].
Dittmar, A. and Duchin, R., 2015. Looking in the rearview mirror: The effect of managers'
professional experience on corporate financial policy. The Review of Financial Studies, 29(3),
pp.565-602.
Dixon, R., Guariglia, A. and Vijayakumaran, R., 2015. Managerial ownership, corporate
governance and firms' exporting decisions: evidence from Chinese listed companies. The
European Journal of Finance, pp.1-39.
Drover, W., Busenitz, L., Matusik, S., Townsend, D., Anglin, A. and Dushnitsky, G., 2017. A
review and road map of entrepreneurial equity financing research: venture capital, corporate

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venture capital, angel investment, crowdfunding, and accelerators. Journal of
Management, 43(6), pp.1820-1853.
Gherghina, S.C., Vintila, G. and Tibulca, I.L., 2014. A study on the relationship between
corporate governance ratings and company value: Empirical Evidence for S&P 100
Companies. International Journal of Economics and Finance, 6(7), p.242.
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https://helda.helsinki.fi/dhanken/bitstream/handle/10138/37072/postnova.pdf?
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Oikonomou, I., Brooks, C. and Pavelin, S., 2014. The effects of corporate social performance
on the cost of corporate debt and credit ratings. Financial Review, 49(1), pp.49-75.
Revilla, A.J., Pérez-Luño, A. and Nieto, M.J., 2016. Does family involvement in
management reduce the risk of business failure? The moderating role of entrepreneurial
orientation. Family Business Review, 29(4), pp.365-379.
Shahwan, T.M., 2015. The effects of corporate governance on financial performance and
financial distress: evidence from Egypt. Corporate Governance, 15(5), pp.641-662.