Financial distress prediction model: The effects of corporate governance indicators |
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Authors: | Chih-Chun Chen Chun-Da Chen Donald Lien |
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Affiliation: | 1. Department of Applied Economics and Management, National Ilan University, Taiwan;2. Department of Economics and Finance, Lamar University, Texas, USA;3. Department of Economics, University of Texas at San Antonio, Texas, USA |
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Abstract: | This paper constructs a financial distress prediction model that includes not only traditional financial variables, but also several important corporate governance variables. Using data from Taiwan, the empirical results show that the best in-sample and out-of-sample prediction models should combine the financial variables with the corporate governance variables. Moreover, the prediction accuracy is higher for the models using dynamic distress threshold values than those with tradition threshold values. Most financial ratios, except for the debt ratio, are higher in financially sound companies than in financial distressed ones. With regard to the corporate governance variables, we find that the CEO/Chairman duality may not result in the outbreak of financial distress, but higher equity pledge ratios of managers (shareholding ratios by board members and insiders) positively (negatively) correlate with financial distress. |
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Keywords: | corporate governance dynamic distress threshold financial distress financial ratio logistic model |
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