An Empirical Study On The Influence Of Corporate Governance Of Financial Risk

In an increasingly competitive environment, financial risk threatens the survival and development of the company all the time.Only carefully find the reasons,Financial risks can be better identified,predicted,prevented and controled by effective measures.Factors of financial risk can be divided into two categories,uncontrollable external factors and controllable internal factors.Controllable internal factors come from the company itself,it can be controlled and prevented by effective measures,It mainly includes inadequate corporate governance structure,inefficient management,poor corporate profits and unreasonable capital structure,etc.In these internal factors, corporate governance occupies an important position.With the growing size of the company and the increasingly complex governance structure,the influence of corporate governance on financial risk becomes increasingly significant. So it is necessary to study financial risk from the corporate governance.In this sense,this article has important theoretical and practical significance.In this article,corporate governance is the narrow corporate governance,it means to build a construction of the organizational framework,which links the board of directors, supervisors,shareholders and managers,for the balance of power to govern the company,and to adopt a set of incentive and restraint mechanisms to drive managers’ interests unanimous of shareholders.Financial risk in this article also is the narrow financial risk,it means that business may not be able to repay maturing debt,so that enterprises suffered losses.By the collection of documents at home and abroad.It is found that the studies on the corporate governance is mainly focused on the relationshipes between corporate governance and financial crisis,financial distress or corporate performance. These articles just from another angle show that corporate governance has a certain impact on the financial risk.From the relationshipes between corporate governance and financial crisis or financial distress,the abilities of company to identify,measure and control the financial risk can be effectively improved.From the relationshipes between corporate governance and corporate performance,the influences of corporate governance on corporate performance can be better understanded,meanwhile corporate performance has a impact on operation ability and profitability,which are both the reasons of financial risk,so corporate governance’impact on financial risk can be grasped.In this sense,these articles provide a literature support for this paper.Through the articles about financial risk,the financial risk is mainly caused by macro environment、financing decision、operation ability,profitability and the influences of corporate governance. Corporate governance is one reason of financial risk.This shows that corporate governance has a direct effect on financial risk,So it provides a theoretical basis for this article.In the theoretical basis,theoretical analysis of the impact on financial risk are started from board characteristics,ownership structure and executives incentive. And based on the previous research achievements,Six hypothesises of this paper are put forward:Hypothesis one:Financial risk is more bigger in the company which the chairman is also the CEO;Hypothesis two:the greater the independent directors proportion,the bigger the financial risk;Hypothesis three:The state-owned holding company’s financial risk is bigger;Hypothesis four:The higher the proportion of the largest shareholder, the smaller the financial risk;Hypothesis five:The greater the equity restriction,the smaller the financial risk;Hypothesis six:The higher the executive pay, the smaller company’s financial risk.Then enter into the phase of this empirical study.1.The selection of samples and the sources of dataes.The samples are selected the manufacturing companies listed on the Main Board of Shenzhen and Shanghai during 2007～2009. According the needs of this research,deleted the missing values and data anomalies,finally 1929 effective samples are obtained.The dataes are from the database of CSMAR.In the empirical study,EXCEL is used to process the dataes and STATA10.0 is for the empircial anlysis.2.The selection of variables.In board characteristics, whether the chairman is the CEO and the proportion of independent directors are selected. In Ownership structure, whether the company is owned by state,the proportion of the largest shareholder and the equity restriction are chosen.In executives incentive,the executive pay is optted.DFL is chosen to meansure financial risk,because DFL is easily found, calculated and compared by the same industry.3.Establishment of model.Multivariate linear regression model is established with DFL as be explained variables,and those measures of corporate governance as explanatory variables.4.The process of empirical study.Frist is the regression results.The total sample of 1929 manufacturing companies is used for empirical analysis.This only proves that the proportion of the largest shareholder and the equity restriction both have an negative correlation with financial risk.But the relationships of the other four indicators are not proved.Considering that this result may be subjecte to the influence of market conditions and requirements,so the total sample is divided into two small samples according to the listing in Shenzhen and Shanghai.Second is the study of two small sample.In the results of the small sample in Shenzhen,two other relationships are proved:Financial risk is more bigger in the company which the chairman is also the CEO,and the higher the executive pay,the smaller company’s financial risk. In the results of the small sample in Shenzhen,the remaining two relationships are proved:the greater the independent directors proportion,the bigger the financial risk,and the state-owned holding company’s financial risk is bigger.Third is the analysis of the differences.This part mainly analysised the differences of whether the chairman is the CEO,the proportion of independent directors,whether the company is owned by state and the executive pay in the two small samples.From the results of the analysis,the influence of whether the chairman is the CEO and the executive pay on financial risk is not signficant in total sample is due to the two unconspicuous relevance in the sample of Shanghai,other two unsignficant influence are due to the the sample of Shenzhen.5.Conclusions and recommendations.According the results an the analysis of the differernce of the three sanmples,the recommendations about how to construct a reasonable corporate governance to control financial risk are put forward.(1)Use two person as the chairman and CEO in the company.This separation can have an effective supervision and restraint on CEO,avoiding that CEO is autocratic to engage in high-risk behavior for their own interest.(2)Take effective measures to play the positive role of independent directors.The role of independent’ directors has not been effective played in our country,the system of independent directors has many defects,so we must Take effective measures.Here two suggestions are proposed:the employment mechanism must be regulated and a perfect mode of independent directors must be set up.(3)Improve the supervision of the managers in the state-owned company.Two following proposals are put forward:first,strengthen the supervisions of the property representative and the managers. Second,standard the assessment mechanism of the performance of the managers.(4)Maintain the relative concentration ownership ownership concentration degree.Holding a large proportion stock of the company,the major shareholders have enough motivation to collect the information about the company and grasp the firm’s true financial statement in time. So they can avoid the deterioration of the financial statement effectively caused by finances abnormity.But the disproportionately large stock of the major shareholders may bring the failure of corporate governance.Therefore, the appropriate balance of equity can make the shareholders supervision,balance the first largest shareholder and ensure more shareholders to participate in,so that more views are get to improve corporate value while facing the firm’s decisions of production management.Therefore, keeping the stock’s relative concentration is advocated in this paper.(5)Continue the incentives of exceutive pay. Closely linked to the company performance,executive pay can play a positive role to reduce financial risk.So the incentives of exceutive pay is must continued.Main contributions of this paper are the following:first,the innovative of the research angle.It is a new area of research that to study the influence of corporate governance on financial risk.Second,the innovatice of the sample.Using the main board listing on Shanghai and Shenzhen as the sample can avoid the non-comparability of different industries and the difference between main board and samll board or GEM.Third,the innovative of the researchi ideas.While four indicators of the regression results were not significant in the total sample,the total sample is divided into two small sample to study according the different place of listing. Fouth,the innovative of research methods.In this paper, statistical and comparative analysis are used to analyze the difference of the three samples.