| The incidence of financial distress has risen dramatically with the increase of listed companies and the development of our capital market. Financial distress is defined as a firm that can not charge or pay the debt at term, including two kinds of specific circumstances. One is that a firm can not return the debt because it failed in managing its capital. The other kind of occurs because of poor business decision or management failure. Once companies enter financial distress, they must face two kinds of results: to reform or bankrupt. If that happens, the owners, lenders and other related parties would encounter major financial losses. So how to avoid entering financial distress becomes the main intention in financial management area. Corporate governance has been regarded as one of the key factors contributing to financial distress. It is one kind of arrangement about the form of corporate organization, control mechanism, supervision mechanism and interest distribution. With the separation of ownership and operation, a controlling manager would desire to go on expropriating wealth for as long as possible. Then the weak governance leads to agency problems. In order to decrease the cost of agency at the same time increase the company value, it is important to design and arrange the corporate governance efficiently. In general, strong corporate governance is a good driver of high achievements. It can help to reduce the possibility of poor decision and management risk. Accordingly, financial distress was just the superficies evidence of weak corporate governance, while inefficiency of governance was the deep-seated reason of financial distress. However, there is sample research that tries to develop early warning systems for financial distress based on financial statements and other related information. This study connected financial distress with corporate governance and examined the real reason of financial distress. Examines for as such, this study is both unique and significant. In 2004, the China Securities Regulatory Commission (CSRC) established laws when listed companies encountered financial concerns, they would be special treated and categorized with special stock codes; that is to say, "*ST"or "ST". This research regards those special treatment firms as distressed firms. During the course of sample selections, those firms involved in financial areas were eliminated, remained 139 distressed firms, then 139 healthy firms were selected to be match group which contrast with the distressed firms. At first, the study analyzed financial distress from two aspects: the ownership structures and the board composition. Then it contrasted and analyzed the healthy firms with the distressed firms in regards to governance characteristics. To study the relationships among governance structures and financial distress, it adopted eight explanatory variables to proxy for corporate governance, namely, the percentage of state ownership, the percentage of corporation ownership, H5, size of the board, the ratio of outsiders, CEO duality, the frequency of board meetings and the percentage of directors ownership. Binary logistic regressions are then fitted to generate dichotomous prediction models. The evidence suggested that the percentage of state ownership and the ratio of outsiders are negatively related to the risk for financial distress, while the percentage of corporation ownership, size of the board, CEO duality, the frequency of board meetings are positively correlated to the risk for financial distress. The percentage of director ownership is positively related too, but the influence was not statistically significant. In conclusion, firms with weak corporate governance are vulnerable to economic downturns and the probability of falling into financial distress increases. In the end of the study, talking a realistic view of our country and the vast economic experience of western capitalism, some suggestions ware given about corporate governance in order to avoid entering financial distress.
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