Corporate Governance Affects Corporate Bankruptcy Risk - Samples

Question: Discuss about the Corporate Governance Affects Corporate Bankruptcy Risk. Answer: Introduction: Corporate governance and corporate bankruptcy risk are interrelated to each other and in recent years, considerable attention has been given on corporate governance. Some of the previous studies have reasoned that there is noteworthy distinction between bankruptcy profitability as well as corporate governance. For bankruptcy, no distinguished word has been established and it is described as decrease in profitability power of company to make repayment of main debt and interest rate. The literature review on the topic concerned is provided by thesis with empirical results and theoretical foundations. Many issues surrounding the bankruptcy and corporate governance are still not resolved and this provides abundant of opportunities for conducting further research. One of the factors that are of increasing importance to corporate governance is prediction of bankruptcy. Main objective of report: The main purpose of preparing report is to ascertain the significant relation between bankruptcy profitability and corporate governance. Analysis of relationship is done by viewing journal articles for supporting the arguments that are presented. Findings summary from literature review: The findings concerning association between bankruptcy risk and corporate governance depicts that occurrence of fiscal crisis probability is decreased by the influence of managing director. However, the features of corporate governance do not considerably influence the occurrence of bankruptcy and financial crisis. It has been concluded that internal control of company is influenced by managing director that help in preventing the bankruptcy and financial occurrence (Dittmar and Duchin 2015). Moreover, it has also been proved that financial conditions of organization and independence of boards of directors are significantly related to each other. It is concluded by such findings that there were less unbound members in the board of directors of the companies who had faced financial risks (Akbar et al. 2016). Furthermore, it has been analyzed in an article, the relationship between risk of bankruptcy and corporate governance is explained by firms need for specialty knowledge and degree of complexities of firms. It has been suggested by the findings from research that risk of firms bankruptcy is inversely related with inside director proportion on board. An organization having better operating performance with strong governance implies that firms are less likely to fail if they have strong shareholder governance (Biddle et al. 2016). Focused discussion on topic with logical arguments and Comparing and contrasting views of different authors: In this particular section, various arguments concerning the topic are supported by reviewing the journal articles. An article on corporate governance indicators and financial ratios in bankruptcy predictions highlights the examination of financial ratios and corporate governance indicators. Most important feature in the study involves ownership and board structures, profitability, and solvency in financial ratios. The most important features in the bankruptcy prediction are corporate governance indicators categories of ownership and board structures (Dixon et al. 2015). However, the findings are not applicable in some markets when there are no obvious corporate governance indicators characteristics. Another article post bankruptcy reorganization performance and corporate governance is based on agency theory. Study is conducted for ascertaining the function of mechanism of corporate governance in determining the post bankruptcy firm performance. It is indicated by the findings from the research conducted that significant determinants of post bankruptcy performance of firm are monitoring and incentive mechanisms. Ownership concentration is the key monitoring mechanisms that are measured by shares held by largest shareholder of organization (Gsmi-ijgb.com 2018). It is indicated by results that such mechanisms and help in increasing performance post bankruptcy can mitigate agency problems in insolvent companies. In an article named does good corporate governance reduces credit risk, the objective of the study is to have a deeper understanding on debt holder and shareholder relationships and expanding the role of corporate governance in organizations. It has been found from the analysis that companies having or providing shareholders with the strongest rights tends to have higher debt financing costs. On other hand, shareholders having weaker rights have considerably lower risks to lower cost of debts and debt holders. An article from Mohamed Saleh Darweesh about correlations between market value, financial performance and corporate governance depicts that common cause of failure among firms are poor corporate governance and weak internal control. Various cases of corporate mismanagement and financial scandals have brought increasing attention on rules and regulation of corporate governance in association with issues of business ethics. Financial crisis and financial scandals in the organizations results in enhancing and strengthening regulation and rules of corporate governance. For contemporary business environment, system of corporate governance is considered important because conflict of interest between stakeholders and firms manager cannot be mitigated by legislations, economic theories and accounting standard (Cao et al. 2017). Findings generated from study depicts that a corporate governance model can be build by corporate governance that would help in protecting the rights of stakeholders and maximization of value of companies (Gherghina et al. 2014). A journal article extracted from eco.journals.com deals with the investigation on empirical relationship between firm value and ratings of corporate governance. It was found from the development of hypothesis in the article that empirical relationship between firm value and developed corporate governance ratings was not statistically validated (Haan and Vlahu 2016). An article extracted from emeraldinsight.com is determining how the financial risk of firms is associated with corporate social responsibility. Research purpose was intended to examine whether firms who are socially responsible are different in terms of financial risks. It was found from the analysis that firms who are socially responsible have better performance in relation to credit ratings and in terms of distance to default. The findings of article demonstrate the significance of considering both negative and positive company performance (Cust.edu.pk 2018). Journal article published and extracted from journal of finance, accounting and management by Aly Salama, Lijuan Xiao and Robert Dixon intend to analyze the relationship between earning management and corporate governance. Two aspects of the article that was focused on this article were on supervisory directors in constraining the earning manipulation and supervisory directors (Revilla et al. 2016). It was found that introduction of board of directors in the organization as an imperative corporate governance element for aligning the interest of managers and shareholders that helps in reducing agency cost that stems from control and ownership separation. Some authors that outside directors as against inside directors could more effectively manage the management claimed it. The reason is attributable to the fact that outside directors have greater incentive for maintaining their reputation capital (Gherghina et al. 2014). On other hand, it was identified by establishing the relationshi p between bankruptcy and corporate governance that managing director influences decrease in financial crisis. While the occurrence of probability of financial crisis have not been considerably impacted by other features of corporate governance. It has been concluded that internal control system of company is impacted by influence of managing directors that would help in preventing the occurrence of bankruptcy and financial disorder. In an article extracted from emeraldinsight.com on the corporate governance impacts on financial distress and financial performance by Tamer Mohamed Shahwan. The purpose of article is to empirically observe the quality of practices of corporate governance on the companies listed in Egypt and impact of practices of corporate governance on financial suffering and overall financial performance of organization. It has been ascertained from the analysis that corporate governance practice within such organizations are relatively low and no positive association was found between likelihood of financial distress and practices of corporate governance. One of the articles extracted from sciencedirect.com that involves conducting more research on performance of firms and corporate governance. It was found in the study that organizations complying with regulations of corporate governance are not a determinant for influencing corporate performance. Earlier research on positive relationship between performance of firms and corporate governance may be prejudiced and the potential endogeneity might not be controlled by them (Gsmi-ijgb.com 2018). Criticizing aspects of methodologies used: In an article where the purpose of author was to investigate the systematic correlation of the likelihood of corporate default with governance provisions that helps in determining the balance between managers and shareholders. Empirical analysis in this particular article has been performed by examination of governance rules that are used as proxy for power of management in relation to shareholders and are associated with financial distress risk measurement that is Ohlsons O score and Altman Z score (Helda.helsinki.fi 2018). Moreover, author used a general logistic regression model for examining the impact of corporate governance rules on corporate default probability. Such model represents default of firms as operating performances, governance functions, characteristic of assets and financial state. Risk factor that is used for the analysis purpose involves the proxy for sharing relationship managers and shareholders. Important predictors for corporate default are accounting a ratio that helps in measurement of financial structure and operating performances. The measurement used in an article intending to examine the relationship between bankruptcy profitability and corporate governance indexes make use of several variable and measurement method. Logit model is used for measuring the bankruptcy risks and the possession for the size of board of directors is measured by using Herfindal-Herishman index (Oikonomou et al. 2014). Findings generated from study depicts that there is a noteworthy and direct relationship between bankruptcy and directors at board. The methodology used by authors in determining the association of corporate social responsibility with the firms financial hazard is KLD social performance rating scores. Such scores are used for measuring the performance of corporate social responsibility (Drover et al. 2017). Monthly consensus earnings forecast for obtained by authors from data stream database. The methodology used by author in assessing the relationship between financial performance and corporate governance, a corporate governance index is constructed in the current study. Such index comprise of four elements such as rights of shareholders and relations of investors, transparency and disclosure, composition of directors at board, control and structure of ownership. Sample taken on non-financial firms forms the basis of assessing the practices of corporate governance on the financial performance (Shahwan 2015). Moreover, Tobins q is used for assessing the corporate performance. At the same time, the indicator used for measuring financial distress is Altman Z score. It is deduced that if the z score is bigger, then risk of financial hazard would be smaller (Christensen et al. 2017). Methodology used in examination of relationship between performance of firms and corporate governance compliance is implementation of robust technology that is generalized method of moments estimation. Governance index was developed for the purpose of investigation of impact on corporate performance (Ararat et al. 2017). Findings of research are based on generalized method of moments estimation that helps in controlling the effects of dynamic endogeneity and unobservable heterogeneity. Identification of gaps in literature review: While analyzing the articles for assessing the relationship between corporate performance and corporate bankruptcy risk, gaps in research was identified in terms of unavailability of data on the variables for considerable period. In addition to this, there was no clear disclosure of the distinction between independent non-executive and executive directors made by listed companies. This made it very difficult for researcher to determine the proportion of independent directors among executive directors. Research gap was also identified in terms of extraction of data from one or two sources. The gaps identified in the analysis had to be filled from estimated or other sources using several ratios. It is therefore indicative of the fact that data has not been sourced uniformly and hence there have been issues of uniformity. Some of accounting non-compliance had also contributed to creation of accounting biases. Results ascertained by conducting research might be skewed due to searching of data from more than one source because intentions and data integrity forms the basis of data using data sources (Berger et al. 2016). Conclusion: Analysis of several research paper on identification of relationship between corporate governance and corporate bankruptcy risk have provided with mixed results. Some papers have concluded that there is positive interrelationship between corporate finance and corporate governance. While some other research paper concluded that, there exist somewhat negative relationship between practices of corporate governance and corporate performance. Nevertheless, analysis of research work has contributed to new knowledge in several ways. Firstly, researcher will be provided a comprehensive platform for conducting comprehensive investigations on the relationship between leverage, ownership concentration and value of firms. Furthermore, findings generated from articles might helps in suggesting variables that would be given priority in making policy for corporate decision-making. The potential interaction that might exist between leverage and ownership concentration can also be investigated with t he help of study. Some of the research area requires empirical work and string conceptualization that would leave many opportunities for conducting future studies. Lastly, credit risk of banks is not explained by factors of corporate governance. Therefore, many researchers have added the factor of corporate governance in test and risk equation for determining whether the corporate governance factors influences risk level of banks and relationship between risk and banks capital. References Akbar, S., Poletti-Hughes, J., El-Faitouri, R. and Shah, S.Z.A., 2016. More on the relationship between corporate governance and firm performance in the UK: Evidence from the application of generalized method of moments estimation.Research in International Business and Finance,38, pp.417-429. Ararat, M., Black, B.S. and Yurtoglu, B.B., 2017. The effect of corporate governance on firm value and profitability: Time-series evidence from Turkey.Emerging Markets Review,30, pp.113-132. 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