An Empirical Study On The Relationships Between Financial Distress And Corporate Governance Of Chinese Listed Companies

Two important characteristics of modern corporations are the separation of ownership from control, and the diffusion of equity among the investors. The separation of ownership from control may result in this agency problem. To mitigate the agency problem, an obvious remedy is to promote the corporate governance. Since the year 1988, when Morck, Shleifer and Vishny found that corporate governance has a significant influence on corporate performance, many academicians have been making efforts in this field and large numbers of studies indicated corporate governance may influence corporately financial distress. Based on the theories and researches on the relationship between financial distress and corporate governance, we find that there are large number of different study results in this field, but so far there is no clear conclusion. In order to better understand the effects of internal control mechanisms on the emergence of financial distress of publicly listed companies in China, this paper mainly selects 140 non-financial publicly listed companies as samples, which only issue A-shares in Shenzhen and Shanghai Stock Exchange before December 31, 2000 (including 70 distress firms and 70 healthy firms), and make use of their 2003-2005 data to examine the theoretical assumptions on the relationship between the corporate governance structure and the financial distress.The empirical analysis consists of three parts: First, to test the multi-collinearity between variables. As a result, we eliminate three variables; Second, in order to identify whether there are significant differences in the corporate governance between the two pair samples, we do paired sample test between distress firms and healthy firms, which offers technical support for our assumptions; Third, to provide the assumptions, and in order to judge whether the problems that exist in corporate governance is the fundamental reason leads to the financial distress we do logistic regression among the proxy variables of corporate governance and the emergence of financial distress, then we conduct a regression model of goodness-of-fit test.Through the empirical analysis we find that there are indeed relations between financial distress and corporate governance. Concretely speaking, the evidence suggested that the extent of ownship concentration, the percentage of insiders ownership and the proportion of independent directors are negatively related to the risk for financial distress, but the influence was not statistically significant.The size of the board are negatively related to the risk for financial distress, while the general manager duality are positively correlated to the risk for financial distress. After analysising the reasons of the above results, the paper made specific recommendations to improve the corporate governance structure, hoping that the implementation of these measures can help the publicly listed companies effectively prevent the emergence of financial distress.