Internal Corporate Governance Structure, Ownership Structure And Financial Distress Of Chinese Listed Companies

In recent years, financial distress has become an important subject in the economic field. In initial stage when the financial distress was studied , the academians only paid close attention to the financial indices which could predict financial distress. With the study deepen constantly, people began to find the deeper reasons that caused financial distress, and introduced other variables to analysis. Now, the focus of this research is the relationship between corporate governance and financial distress.The purpose of this research is to explore the relationship among internal corporate governance structure, ownership structure and finacial distress in Chinese listed companies, and we want to find the methods to improve their internal corporte governance structure and ownership structure, which makes the companies health.This study is important to the supervision departments, investors and the listed companies themselves. First, financial distress makes the supervision departments examine the internal corporate governance structure and the ownership structure; on the other hand, the supervision departments regard the unefficient internal corporate governance structure as a signal that may cause the financial distress , and they announce to the society. In order to have good reputations , the companies will improve their internal corporate governance structure and ownership structure. Second , the investors can understand the operation of the listed companies and cope with the management risks. This contributes to protecting their own interests. Third, perfect internal corporate governance structure can benefit the firms in the aspects of changing financial distress, expanding the core business and promoting their values. In addition, this research helps the policy makers to perfect the relevant laws and regulations.On the basis of studies before, combining the realistic situation of the Chinese listed companies and analysing the ownership structure and the internal corporate governance structure which was composed by the shareholders' meeting, board of directors, board of supervisors and managers, this paper examines the effects of internal control mechanism on financial distress of Chinese listed companies. After comprehending the meaning of internal corporate governance structure and investigating the fuctions of shareholders' meeting , board of directors , board of supervisors and managers , we analyze the characteristics and reasons of unefficient internal corporte governance structure and limited ownership structure in Chinese listed companies, and then explain their effects on financial distress. Invalid internal corporate governance structure and the ownership structure that is unfavorable to protect the investors are prone to cause financial distress. Second, the empirical results have reflected the conditions and problems of the internal corporate governance structure and ownership structure in Chinese listed companies and have proved the hypothesis that the unefficient internal corporate governace structure is one of the main reasons that caused financial distress. Finally, we provide the corresponding policy recommendations.We make theory analysis and empirical tests in this paper. On the basis of studies before, we define financial distress firms as firms with financial abnormal special treatment (ST) in China. In our sample period 1998 to 2003, we choose 149 firms which were classified as financially abnormal ST firms. Accordingly, we create 149 matching sample firms for this study. The benchmarks for selecting a matching firm include similar asset size and same industry characteristics. We collect the data then and choose variables including the numbers of the directors on the board , CEO duality , the percentage of insiders on the board , the fraction of equity ownership by all officers and directors as a group, the fraction of equity ownership by the CEO, the fraction of equity ownership by the chairman of the board , the numbers of the supervisors , ownership concentration and the fr...