Board of directors’ effects on financial distress evidence of family owned businesses in Lebanon

The objective of this paper is to determine the managerial governance characteristics related to financial distress companies. The boards failed to accomplish their monitoring duties, which seemed to be one of the main reasons behind the actual financial distress and bankruptcy that swept the companies across the planet. Through the analysis of a sample of 178 Lebanese non listed and owned family firms, the results showed that the boards (that have a higher proportion of outside directors) are less inclined to face a financial distress than the boards with a lower proportion. Besides, a different conclusion proves that the board’s size and financial distress are directly linked. The paper highlights the extent to which financial distress is associated with corporate governance from a Euro Mediterranean country. It would be a source of education to Lebanese investors who excessively go for short-term returns and of help for regulatory authorities in the framework of making policies on corporate governance reformation.     

Corporate governance and the insolvency risk of financial institutions

We investigate whether shareholder-friendliness of corporate governance mechanisms is related to the insolvency risk of financial institutions. Using a large sample of U.S. financial institutions over the period 2005–2010, we find that corporate governance is positively related to the insolvency risk of financial institutions as proxied by Merton’s distance to default measure and credit default swap (CDS) spread. We also find that “stronger” corporate governance increases insolvency risk relatively more for larger financial institutions and during the period of the financial crisis. Lastly, our results suggest that shareholder-friendliness of corporate governance mechanisms is viewed unfavorably in the bond market.     

The recurrence of financial distress: A survival analysis

Companies often suffer periods of financial distress before filing for bankruptcy. Unlike one-off bankruptcies, financial distress can occur repeatedly within the same individual firm. This paper is focused on the recurrence of financial distress and studies the Chinese stock market, where Special Treatment – an official indicator of financial distress – can be repeatedly applied to a listed company. We employ a stratified hazard model to predict the probability of subsequent distress with variables, including duration dependency, event-based factors, institutional variables, financial ratios, market-based variables and macroeconomic conditions. Our empirical results show that accounting and market-based variables have limited power in predicting the recurrence of distress, whereas the duration of recovery, restructuring events and their interaction terms with the accounting and macroeconomic factors affect the recurrent risk significantly. Tested on out-of-time samples, our proposed hazard models show a robust performance in the prediction of recurrent risk over time.     

The duality of bankruptcy process in Finland

Standard bankruptcy prediction methods lead to models weighted by the types of failure firms included in the estimation sample. These kinds of weighted models may lead to severe classification errors when they are applied to such types of failing (and non-failing) firms which are in the minority in the estimation sample (frequency effect). The purpose of this study is to present a bankruptcy prediction method based on identifying two different failure types, i.e. the solidity and liquidity bankruptcy firms, to avoid the frequency effect. Both of the types are depicted by a theoretical gambler's ruin model of its own to yield an approximation of failure probability separately for both types. These models are applied to the data of randomly selected Finnish bankrupt and non-bankrupt firms. A logistic regression model based on a set of financial variables is used as a benchmark model. Empirical results show that the resulting heavily solidity-weighted logistic model may lead to severe errors in classifying non-bankrupt firms. The present approach will avoid these kinds of error by separately evaluating the probability of the solidity and liquidity bankruptcy; the firm is not classified bankrupt as long as neither of the probabilities exceeds the critical value. This leads the present prediction method slightly to outperform the logistic model in the overall classification accuracy.     

拯救浙商——危机企业重整之路

●每当浙江民间金融危机爆发,舆论焦点往往集中在对宏观调控一刀切、民营企业贷款难等外部政策问题的抨击,而较少关注企业内部的风险因素●陷入债务危机的企业经历破产重整后,公司的治理结构得到重建和升级,投机行为受到抑制,长期价值重受关注●对于当前陷入资金链危机的民营企业,政府需要进行某种限度的干预,也只有它有能力干预     

The dynamic financial distress prediction method of EBW-VSTW-SVM

Financial distress prediction (FDP) takes important role in corporate financial risk management. Most of former researches in this field tried to construct effective static FDP (SFDP) models that are difficult to be embedded into enterprise information systems, because they are based on horizontal data-sets collected outside the modelling enterprise by defining the financial distress as the absolute conditions such as bankruptcy or insolvency. This paper attempts to propose an approach for dynamic evaluation and prediction of financial distress based on the entropy-based weighting (EBW), the support vector machine (SVM) and an enterprise’s vertical sliding time window (VSTW). The dynamic FDP (DFDP) method is named EBW-VSTW-SVM, which keeps updating the FDP model dynamically with time goes on and only needs the historic financial data of the modelling enterprise itself and thus is easier to be embedded into enterprise information systems. The DFDP method of EBW-VSTW-SVM consists of four steps, namely evaluation of vertical relative financial distress (VRFD) based on EBW, construction of training data-set for DFDP modelling according to VSTW, training of DFDP model based on SVM and DFDP for the future time point. We carry out case studies for two listed pharmaceutical companies and experimental analysis for some other companies to simulate the sliding of enterprise vertical time window. The results indicated that the proposed approach was feasible and efficient to help managers improve corporate financial management.     

Where Corporate Governance and Financial Analysts Affect Valuation

We examine whether corporate governance and financial analysts affect accounting-based valuation models for B and H shares traded by foreign investors in China and Hong Kong, respectively. We expect that better corporate governance and more effective analyst activity mitigate potential adverse effects on accounting valuation models generated by country-specific problems in accounting, auditing, and legal systems. We find that valuation models perform better for companies with a greater analyst following, smaller forecast errors, relatively high public ownership and a strong board structure. Valuation models and accounting numbers have only limited explanatory power and valuation role for companies with weak governance and less effective analyst performance. The findings are robust across various market value, return, unexpected return, and other accounting valuation models. The results are consistent with less informed foreign investor clienteles searching for signals of more effective analyst activity and better corporate governance mechanisms.     

财务会计信息与公司治理

财务会计系统不但给公司控制机制提供直接的财务信息,而且还提供股票价格中反映的所有间接信息。会计治理研究中的一个基本目标是为财务会计提供的信息,在多大程度上减缓由所有权和经营权两权分离所带来的代理问题,以及减少信息不对称问题提供证据。本文着重探讨财务会计信息在公司治理机制中的作用,公司治理机制对财务会计信息反作用的互动研究,并提出了公司治理的对策。     

Strategic stakeholder management,environmental corporate social responsibility engagement,and financial performance of stigmatized firms derived from Chinese special environmental policy

We draw upon the stigma literature and strategic stakeholder management model to develop a framework capable of explaining the link between environmental corporate social responsibility (ECSR) engagement and financial performance of stigmatized firms, taking stakeholder‐oriented governance and density of local stigmatized firms into consideration. Using a uniquely compiled dataset of Chinese firms specifically monitored by the Ministry of Environmental Protection of China, we conducted propensity score matching analysis to estimate the impact of stigma on corporate financial performance and corporate environmental responsibility. The result shows that the financial performance of stigmatized firms is negatively affected by the stigma label, spurring them to engage in more ECSR than their peers to improve their legitimacy. Though ECSR engagement of stigmatized firms is found to be negatively associated with their financial performance in current study. Our results also confirm that (a) the financial performance of stigmatized firms is positively affected by two proxies for corporate stakeholder‐oriented governance (i.e., institutional ownership and corporate transparency) and negatively affected by the density of local stigmatized firms; (b) corporate stakeholder‐oriented governance compensates for the negative effect of ECSR engagement; (c) high intensity of local stigmatized firms provides focal firms with an opportunity to improve their financial performance through ECSR engagement; and (d) the positive effects of corporate stakeholder‐oriented governance are diminished by the density of local stigmatized firms.     

上市公司中期财务报告自愿审计的公司治理动因——基于深圳证券市场的经验证据

本文立足于我国新兴资本市场中上市公司自愿接受中期财务报告审计这一独特的典型现象,借助于深圳证券市场的经验数据,以“审计需求动因”为理论基础,尝试通过构建经验模型,分析自愿接受中期财务报告审计的企业所具备的公司治理特征。本文采取Spearman描述性统计和Logit回归分析方法进行研究,研究发现资产负债率和资产收益率显著影响是否自愿接受中期财务报告的审计,独立董事比例、第一大股东持股比例及控股如否、管理层持股比例、两职合一以及股权制衡因素影响均不显著。     

CORPORATE GOVERNANCE OF BANKS: A SURVEY

This paper reviews the empirical literature on the corporate governance of banks. We start by highlighting the main differences between banks and nonfinancial firms and focus on three characteristics that make banks special: (i) regulation, (ii) the capital structure of banks, and (iii) the complexity and opacity of their business and structure. Next, we discuss the characteristics of corporate governance in banks and how they differ from the governance of nonfinancial firms. We then review the evidence on three governance mechanisms: (i) boards, (ii) ownership structures, and (iii) executive compensation. Our review suggests that some of the empirical regularities found in the literature on corporate governance of nonfinancial institutions, such as the positive (negative) association between board independence (size) and performance, do not hold for banks. Also, existing work provides no conclusive results regarding the relationship between different governance mechanisms and various measures for banks’ performance. We discuss potential explanations for these mixed results.     

Financial distress prediction based on SVM and MDA methods: the case of Chinese listed companies

How to accurately predict financial distress is an important issue for enterprise managers, investors, creditors and supervisors. In this paper we develop SVM models (Support Vector Machine) and MDA (Multivariate Discriminant Analysis) models, using Chinese listed companies as our sample. The empirical results show that the prediction ability of SVM models outperforms the MDA models. Additionally, internal governance and external market variables, as well as macroeconomic variables are added as the predictive variables. The results indicate that these variables have theoretical and empirical linkage with the financial distress of Chinese listed companies.     

Mixed ownership of industrial firms in Japan: debt financing,banks and vertical keiretsu groups

In the 1980s, Japanese bank-driven corporate governance practices were often said to be part of the explanation for Japan’s economic success. However, these practices became suspected causes of Japan’s continuing recession following the burst of the financial bubble in 1990. Since then Japanese banks have suffered from increasing numbers of non-performing loans. Consequently, banks have become less able to act as the benefactors for Japanese firms. In response to the reduced supply of bank loans, Japanese firms have been exploring issuing corporate bonds and other types of public debt as alternative methods of debt financing. The objective of this paper is to examine empirically how Japanese manufacturers have responded to the deteriorating financial conditions of Japanese banks from a corporate finance perspective. In particular, we are interested in knowing whether Japanese banks’ involvement in corporate governance has declined with the increase in public debt issuances. Our empirical results seem to suggest that Japanese banks play a significant role in their client firms’ issuances of public debt and hence continue to play a significant role in corporate governance.     

Corporate Governance and Accruals Earnings Management

This study examines the association between corporate governance and accruals earnings management using a corporate governance index consisting of 55 individual corporate governance measures. Prior literature has focused primarily on certain individual corporate governance measures, overlooking the multidimensional character of corporate governance. Based on a sample of firms listed on the Athens, Milan and Madrid Stock Exchanges, we find an inverse relationship between corporate governance and earnings management. Corporate governance provisions seem to constrain the tendency of management to manage earnings leading to higher credibility for financial statements. Additional tests suggest that the negative relationship holds for large and middle capitalization firms but not for the small capitalization sample. In addition, corporate governance provisions limit upwards but not downwards earnings management. This study emphasizes the multilevel character of corporate governance and suggests the usage of comprehensive measures of corporate governance in the academic research. This study also stresses the importance of introducing corporate governance mechanisms in order to ensure the integrity of the financial reporting process. Practitioners are expected to evaluate the corporate governance provisions that each firm has put in place, whereas policy makers are expected to mandate the application of a wide range of corporate governance mechanisms. Copyright © 2011 John Wiley & Sons, Ltd.     

Corporate Governance and the Environment: What Type of Governance Creates Greener Companies?

We build on a stakeholder–agency theoretical perspective to explore the impact of particular corporate governance mechanisms on firm environmental performance. Our empirical evidence shows that several important corporate governance mechanisms such as the board of directors, managerial incentives, the market for corporate control, and the legal and regulatory system determine firms' environmental performance levels. These results suggest that these different governance mechanisms resolve, to some extent, the existing divergence of interests between stakeholders and managers with respect to environmental activities.     

Die Implementierung von Prüfungsausschüssen/ Audit Committees des Aufsichtsrats/Board of Directors mit unabhängigen und finanzkompetenten Mitgliedern

The agency- and stewardship theory attach great importance to the implementation of audit committees in the one tier- and two tier system. The mentioned theories can explain the corporate governance function of audit committees. In order to strengthen corporate governance, the job specification emphasises the independence and financial expertise of the committee’s members. The present article provides an overview of the historical development of audit committees and their normative affiliation in the German stock corporation law (two tier system). Moreover, their role as representatives of the one tier system in the US American capital market is being addressed. The results suggest more restrictive standards regarding the implementation and job specification of the audit committee at the US stock exchange (Sarbanes Oxley Act; New York Stock Exchange [NYSE], National Association of Securities Dealers Automated Quotations [NASDAQ]) than in the German stock corporation law (including the German corporate governance code). In addition to the normative analysis, the present paper provides a summary of results of existing, primarily US American empirical research with regard to the influence of audit committees on selected corporate governance indicators. The results show that the vast majority of the respective studies prove a significant correlation between audit committees and the restriction of earnings management, the identification and prevention of management failures and fraud with regard to the balance sheet, the external management reporting as well as the quality of the external audit. As a consequence of differing corporate governance systems, the results of the US American corporate governance studies can be applied only to a limited extend to the German two tier system. Monitoring by the capital market is even lower in Germany. In support of the respective empirical results and in order to strengthen corporate governance in the one tier system, future research is needed regarding the implementation of audit committees in the German two tier system.     

The effects of handling outliers on the performance of bankruptcy prediction models

Ratio type financial indicators are the most popular explanatory variables in bankruptcy prediction models. These measures often exhibit heavily skewed distribution because of the presence of outliers. In the absence of clear definition of outliers, ad hoc approaches can be found in the literature for identifying and handling extreme values. However, it is not clear how these different approaches can affect the predictive power of models. There seems to be consensus in the literature on the necessity of handling outliers, at the same time, it is not clear how to define extreme values to be handled in order to maximize the predictive power of models. There are two possible ways to reduce the bias originating from outliers: omission and winsorization. Since the first approach has been examined previously in the literature, we turn our attention to the latter. We applied the most popular classification methodologies in this field: discriminant analysis, logistic regression, decision trees (CHAID and CART) and neural networks (multilayer perceptron). We assessed the predictive power of models in the framework of tenfold stratified crossvalidation and area under the ROC curve. We analyzed the effect of winsorization at 1, 3 and 5% and at 2 and 3 standard deviations, furthermore we discretized the range of each variable by the CHAID method and used the ordinal measures so obtained instead of the original financial ratios. We found that this latter data preprocessing approach is the most effective in the case of our dataset. In order to check the robustness of our results, we carried out the same empirical research on the publicly available Polish bankruptcy dataset from the UCI Machine Learning Repository. We obtained very similar results on both datasets, which indicates that the CHAID-based categorization of financial ratios is an effective way of handling outliers with respect to the predictive performance of bankruptcy prediction models.     

The analysis of corporate governance policy and corporate financial performance

The main purpose of this study is to investigate the relationship between the quality of corporate governance policy and the firm financial performance and. Data were collected from Corporate Library. A sample of 3,068 firms from the database of 2010 Corporate Library was analyzed. Logistic regression models were employed and SPSS statistical package was utilized to perform the analysis. Our results show that when firms have better corporate governance policies, they are more likely to perform better. Specifically, when firms have a better board rating, compensation policy, takeover defense strategy, accounting practice, and a formal governance policy, they are more likely to perform better than their counterparts without such quality corporate governance policies.     

The liquidation/merger alternative some results for the UK corporate sector

Previous researchers have explicitly extended the definition of corporate failure to include distressed acquired firms when they are (mis) classified by statistical models as failing. We argue that this approach is erroneous, since the acquisition of a financially distressed firm is an entirely separate economic outcome from corporate failure. This paper reports some new evidence for the UK corporate sector where the acquisition of a distressed firm is modelled as a distinct alternative to corporate failure. Our empirical results suggest that it is feasible to develop statistical models which are able to discriminate, with a reasonably high degree of accuracy, between those distressed firms which fail and those where a timely merger appears to serve as a viable alternative to corporate bankruptcy.     

Do managerial behaviors trigger firm exit? The case of hyperactive bidders

This paper investigates the effects of managerial mergers- and acquisitions-related investment strategies on the exit risk of firms. Using a sample of hyperactive bidders, I show that managerial excessive acquisitiveness can precipitate firm exit. Overbidding is associated with weak corporate governance and lower disclosure quality within firms. I find that hyperactive bidders take more risk compared to conservative bidders. Such bidders also misallocate firms’ resources and dent firms’ reputational capital. Eventually, the external corporate control market is more effective compared to mechanisms such as bankruptcy reorganization, forced liquidation, leveraged buy-out, and expulsion from stock exchanges in disciplining hyperactive bidders by turning them into targets of takeover. These results suggest that a hyper acquisition-induced growth strategy is, on average, detrimental to the long-term survivability of firms and that the internal and external corporate-control mechanisms may not be effective enough to forestall falling value of an excessively acquisitive firm.