Corporate governance and financial distress: Asian emerging market perspective

• Date: 11 February 2021
• DOI: https://doi.org/10.1108/CG-04-2020-0119
• Pages: 702-715
• Published date: 11 February 2021
• Subject Matter: Strategy,Corporate governance
• Author: Noman Younas,Shahab UdDin,Tahira Awan,Muhammad Yar Khan

Corporate governance

and f‌inancial distress: Asian

emerging market perspective

Noman Younas, Shahab UdDin, Tahira Awan and Muhammad Yar Khan

Abstract

Purpose –The purpose of thispaper is to examine the impact of corporategovernance index (PAKCGI)

on firm financial distressfor a sample of 152 non-financial firms listed at Pakistan StockExchange (PSX)

over the periodfrom 2003 to 2017.

Design/methodology/approach –To examine the impact of PAKCGI on financial distress (Altman Z-

Score), random effect model is applied. The PAKCGI is a self-constructed index based on the five

important factors of corporate governance practices, i.e. board of directors, audit committees, right of

shareholders, disclosures and risk management. The binary coding approach is adopted for the

construction of PAKCGI. Altman Z-Score model is used as a proxy for financial distress indicator. The

absolutevalue of Altman Z-score has been takenas financial distress indicator.

Findings –The outcomes of the study indicate a positive impact of PAKCGI on risk of firms’ financial

distress. Thepositive coefficient of PAKCGI implies that the good corporatepractices work as catalyst to

reduce risk of financial distress in Pakistan. A significant negative impact of block holders on financial

distress suggests that the concentrated block ownership take monopolistic decision to protect their

interests. It has also beenobserved that significant positive impact of institutionalownership on financial

distress exists in the Pakistanilisted firms. Furthermore, this study also reveals that significant negative

associationbetween board size, CEO duality and financialdistress indicator.

Research limitations/implications –The findings may encourage the Pakistani listed companies to

follow and implement good corporate governance practices, which would lead to increase the

confidenceof investors, regulators and stakeholders.

Originality/value –The current study extends the corporate governance literature by examining the

relationship between the corporate governance attributes and the financial distress status of Pakistani

listed companies. From the academic perspective, this paper adds to the knowledge concerning the

associationbetween corporate governancepractices and risk of financial distress in emergingmarkets.

Keywords Emerging markets, Corporate governance, Corporate governance index,

Financial distress, Binary coding, PAKCGI, Z-score

Paper type Research paper

1. Introduction

Corporate governance, and its impact on the firms’ financial distress, is one of the most

researched areas in contemporary corporate finance. The recent corporate frauds leading

to failure of organizations and financial crises have attracted the attention of academicians,

researchers and policy makers to deeply investigate the underlying mechanisms of

corporate governance. It also puts a doubt on the current corporate governance

mechanisms whether it is effective in preventing the companies from the happenings

(Alabede, 2016). Further, Core et al. (1999) argued that prevalence of weak CG

mechanisms in an organization can elevate the chances of agency problems. Financial

distress is usually regarded as the embarrassing situation of not being able to pay mature

Noman Younas is based at

the Department of

Management Sciences,

COMSATS University

Islamabad –Wah Campus,

Wah Cantt, Pakistan.

Shahab UdDin is based at

the Department of Business

Management Sciences,

Karakoram International

University, Gilgit, Pakistan.

Tahira Awan is based at

Faculty of Management

Sciences, International

Islamic University, Kuala

Lumpur, Malaysia.

Muhammad Yar Khan is

based at the Department of

Management Sciences,

COMSATS University

Islamabad –Wah Campus,

Wah Cantt, Pakistan.

Received 1 April 2020

Revised 30 August 2020

16 October 2020

11 December 2020

Accepted 17 December 2020

The authors would like to thank

Editor in Chief, Associate

Editor, and the anonymous

referees for their valuable

comments. The author would

also like to take this opportunity

to thank COMSATS University

Islamabad, Wah Campus,

Karakoram International

University Gilgit-Baltistan-

Ghizer Campus and

International Islamic University,

Islamabad, Pakistan for sparing

us to conduct this valuable

research.

PAGE 702 jCORPORATE GOVERNANCE jVOL. 21 NO. 4 2021, pp. 702-715, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-04-2020-0119