Corporate governance and corporate failure

Abstract

Numerous studies have explored the relationship between corporate governance and corporate financial performance - see Zahra and Pearce (1989) for a review. In contrast, only a few studies have looked at corporate governance and corporate failure (Daily and Dalton, 1994a, 1994b; Gales and Kesner, 1994; Sheppard, 1994b; Hambrick and D'Aveni, 1992; Chaganti, Mahajan and Sharma, 1985). It is surprising that more studies have not examined the governance-failure relationship, especially when I consider the often equivocal results of the governance-performance literature. Such equivocal findings may, in part, be attributable to problems in the definition and measurement of performance. In this regard, corporate failure can be seen to provide a more useful measure of a company's ultimate performance. By looking at companies at two extremes - those that survive and those that fail - we may gain greater insights into which, if any, governance variables are important in avoiding corporate failure. Increasing our understanding of the relationship between corporate governance and corporate failure is the purpose of this paper. In the next section I review, first the literature relating to corporate governance and corporate failure and, then, the literature relating to other causes of corporate failure. In section three I discuss the sample used to test various hypotheses generated in the literature review. I then proceed, in section four, to present the operationalisation of the variables of interest. Section five presents the results of my analysis and a discussion. Finally, section six concludes this paper.