Research On Impact Of Listed Companies’ Corporate Governance On Financial Risk

Research on corporate governance and financial risk has always been an important topic in the field of financial management. At present, the imperfect corporate governance of listed companies in China, such as the failure mechanism of checks and balances, unreasonable capital structure, management override of internal control, major shareholders’entrenchment, manager expropriation etc., has greatly increase the company’s financial risk, hindering the company to further development. Studying the impact of corporate governance on financial risk could help companies improve their corporate governance, reduce financial risk, and constantly improve the companies’ability to deal with and control risk.This paper researches from shareholders, management and board of directors, studying the relationship between corporate governance and financial risk respectively in state-controlled and non-state-controlled listed companies, and finally on this basis to find the best way to improve corporate governance.This study can be divided into three main parts:the theoretical part, current situation analysis and empirical analysis. In the theoretical part, on the basis of reviewing some classical theories and literatures, this paper define the concepts of corporate governance and financial risk, and analyze the relevant theories that the research involves, such as transaction cost theory, property rights theory, agency theory and so on, to provide the strong support for the empirical research of this paper. In the part of current situation analysis, this paper describes and analyses the current situation and characteristics of corporate governance of listed company in China at three levels:the ownership structure, executives, board of directors.In the part of empirical research, based on the above theoretical and current situation analysis, this paper analyses the possible ways and results of various governance variables’impact on financial risk, and accordingly put forward ten hypotheses. Then it creates a multiple linear regression model, and use companies listed on the Main Board of Shenzhen and Shanghai during2009-2012as the research object to test the hypotheses proposed. Finally, the paper explains the possible reasons for the empirical results and proposes targeted countermeasures.The empirical results show that corporate governance of listed companies has a certain impact on corporate financial risk, and the impact differs from state-controlled and non-state-controlled listed companies.(A) In state-controlled listed companies, the proportion of State-owned shares and tradable shares do affect corporate financial risks, while, in non-state-controlled listed companies, there are no correlations between them. However, in both state-controlled and non-state-controlled companies, ownership concentration and equity balance degree both have negative correlations with financial risk, and the correlation in the state-controlled listed companies is more significant. These results can provide a theoretical basis for companies of different nature to take different ways to improve the ownership structure, thus minimizing corporate financial risks effectively.(B) In the aspect of management characteristics, there is a significant negative correlation between management compensation and financial risk in non-state-controlled companies rather than state-controlled companies. However, managerial ownership do effect financial risk in both kind of companies, but the correlation in the state-controlled listed companies is more significant. These conclusions provide a reference for companies of different nature to perfect their pay mechanism and motivate managers in order to reduce agency costs and financial risk. Inconsistent with the expected result, financial risk is smaller in state-controlled companies where the chairman is also the general manager, it may because the duality of these two positions to some extent countervails the inefficiency of state-owned enterprises, led by rigid organization and inefficient operation. In non-state-controlled companies, the duality of positions between the chairman and the general manager has no correlation with financial risk, which may because the chairman failed to lead the board of directors properly, leading board oversight not being effectively carried out.(C) In the aspect of board of directors, there is a significant "U"-shaped relationship between Board size and financial risk in state-owned enterprises, and a positive correlation between the number of board meetings and financial risk in non-state-controlled companies. However, the proportion of the independent directors has not played their roles fully, which indicates the independent director system should been improved immediately.Aiming at corporate governance in the listed company, and the influence of it on financial risk, this paper argues it should been done in two ways, improving the internal corporate governance and the external system, to constantly improve the quality of corporate governance and reduce financial risk. Improving internal corporate governance means optimizing the ownership structure, appropriate reduction of state-owned shares, an appropriate increase in corporate ownership concentration and equity balance degree, the establishment of an effective incentive mechanism to ensure the separation of supervision and executive functions, optimizing the board structure, improving the independent director system and so on. Meanwhile, the external system can be enhanced by improving the different types of shareholders’equity, creating a talent market competition mechanism, establish a legal system which is conducive to capital investment, and guide investors to set up correct investment philosophy.