Study On The Relationship Among Corporate Board Structure, Firm Growth And Insolvency Risk

Studies prove that a consistent rise in insolvency risk needs to be addressed at the strategic level.Boards can use leverage decisions as a tool to control the insolvency risk.However,following information asymmetry theory,leverage acquisition is subject to fixed assets used as collateral.Corporate boards monitor managerial decisions as concluded by the monitoring hypothesis.In this scenario,the present study stresses that leverage decisions can be used as a tool to control insolvency risk.The current research focuses on the relationship between board structure and insolvency risk,mediated by debt maturity and moderated by fixed collaterals in Pakistan based non-financial firms.The second aspect of this study relates to firm growth based on life cycle theory.The firm growth is desirable,but it brings an associated bundle of high risks.One of the significant reasons in developing economies causing insolvency risk is the acquisition of mismatched leverage maturity and asset maturity structure to finance firm growth.The growthinsolvency risk puzzle needs to be discussed more frequently due to contradictory revelations.Current research suggest that internal and external firm growth can also have a different association with insolvency risk specifically after introducing leverage decisions and potential fixed collaterals as mediators and moderators.Literature support the linkages of governance variables to insolvency risk in general based on the agency theory and also the linkage of capital structure to the insolvency risk based on pecking order theory.The consequences on corporate insolvency risk that may arise due to interaction between agency theory and pecking order theory is scarce.This research addresses this missing link in the literature.It also involves the empirical investigation by further inculcating the life cycle aspect of firms through indirect linking of firm growth as literature only supports direct impact of firm growth on insolvency risk.The role of potential fixed collaterals in risk reduction as supported by managerial information symmetry is attached in the same framework.Past studies have scattered evidence in this regard which reveals contradictory results.This study has filled this literature gap in a cumulative sense to make more coordinated interpretations.This study took a quantitative approach by using firm-level secondary data through multiple sources,including(1)Pakistan Stock Exchange(PSX),(2)State Bank of Pakistan(SBP),and(3)respective websites of the firms.The five-year secondary data comprised 284 firms from 2013 to 2017.The thesis employed the newest approach called Hierarchical Multiple Regression Approach to the data to analyze the mediation and moderation of leverage decisions and potential fixed collaterals.Leverage decisions included in this study are capital structure decisions and debt maturity decisions.It enables us to analyze a comparative mediating role of capital structure and debt maturity,which is uncommon in past literature.The data for study variables possess autocorrelation,cross-sectional dependence,and group-wise heteroskedasticity.Therefore,proposed hypotheses are tested by panel corrected standard errors(PCSE)regression.We used PCSE as our baseline regression estimator because our panel data is contemporaneous.For sensitivity analysis,we also applied feasible generalized least squares(FGLS)regression.The corporate board structure results reveal that CEO duality has a significant negative direct effect on emerging market Z score.The other two aspects of board structure namely board independence and board size had an insignificant direct role in controlling insolvency risk.The indirect impact of board structure proved that the debt maturity ratio positively mediates the relationship between board structure and insolvency risk.The debt maturity decisions were confirmed to be having full mediation on the relationship of board independence and board size with insolvency risk.The CEO duality and insolvency risk relationship were partially mediated by debt maturity.However,capital structure did not mediate any of the proposed relationships throughout our analysis.Similar pieces of evidence were gathered by both the regression estimators throughout this study.These results suggest that debt maturity decisions are more crucial than capital structure decisions because insolvency risk is concerned.Long-term debt acquisition is a safe route for the company management to avoid high insolvency risk in the Pakistani market.The results regarding the direct impact of the individual components of firm growth are contradictory.The internal firm growth had a negative but insignificant effect on emerging market Z score.Whereas,external firm growth had a positive and significant impact on emerging market Z score.The mediating role of leverage decisions proves that the debt maturity ratio fully mediates the relationship between internal firm growth and insolvency risk.There was a partial mediation by debt maturity ratio on the relationship between external firm growth and insolvency risk.The insignificant mediating effects of capital structure on the relationships between firm growth and insolvency risk remain consistent for both internal and external growths.These results are also insensitive even after applying the alternate regression estimators.New information is generated on the moderating role of potential fixed collaterals.The moderating role of potential fixed collaterals on the relationship between leverage decisions and insolvency risk displays contrasting results for debt maturity and debt-equity ratios.The potential fixed collaterals negatively moderate the relationship between debt maturity and insolvency risk but did not moderate the relationship between capital structure and insolvency risk.This evidence remains consistent throughout the empirical analysis with different independent variables.These results are also robust to both regression techniques confirming the nonproductive fixed collaterals that overshadow the positives of having tangible assets in asset structure.This research contribute to the existing literature on insolvency reduction in number of ways.First,the study early explores the mediating role of both aspects of leverage decisions including capital structure and debt maturity.Second,it discriminates the direct and indirect impacts of internal and external firm growth in a single study.Third,it employs hierarchical multiple regression approach which is a latest and comprehensive approach to report mediation and moderation analysis.Last,this study investigates the role of potential fixed collaterals as moderator in a single framework which also count as novelty.The results recommend that firms facing high insolvency risk should focus on debt maturity structure that can be used as a tool in controlling insolvency risk.An increase in the proportion of long term debt can reduce insolvency risk as the short term loan expedites the insolvency risk due to the associated rollover risk.Managers that wish to achieve safe growth levels,either internal or external,should focus on safe financing options.Also,they should accumulate the productive tangible assets that can be used as fixed collaterals in the shareholders' best interests.Less reliance on short term loans and better negotiation of loans through productive fixed assets can help firms avoid or reduce the insolvency risk in listed non-financial firms of Pakistan.