| Summary: | A large number of researchers devote themselves to the study of
financial distress predictive models over the past decades. The first
analysis method, which is Univariate approach, towards predicting
model was introduced by Beaver (1966) and Multiple Discriminant
Analysis (MDA) was proposed by Altman (1986) thereafter. Due to the
fact that these two approaches can not perform precisely to predict a
financial distress, Martin (1977) introduces the Logit model applied in
the predictive models and Ohlson (1980) even expands selected samples to improve the accuracy rate of prediction.
Although prediction models of financial distress have been improved
via various applied statistic models, more information should be
included to improve the quality of predictive models. Hence, Daily and
Dalton (1994a) conduct a study to explore the relationship between
corporate governance mechanism and probabilities that companies
might experience financial crisis by means of considering both
financial and governance variables since corporate governance has
been proved that it has a substantial impact on the performance of
firms.
To investigate whether corporate governance is related to the
probability of financial distress, ten governance variables are adopted
in this study and the Binary Logit model is employed to establish a
financial distress predictive model. The results indicate that seven
variables, which are the percentage of shares held by institutional
shareholders, the extent of concentration, cash flow rights, the ratio
of cash flow to control rights, the ratio of board seats held by outside directors and supervisors, management participation and stock
pledge ratio, have a significant impact on the financial distress
predictive probability. The classification accuracy rate is also raised by means of adopting governance variables besides financial variables in the predictive models and the predictive model perform differently in the electronic and non-electronic industry. It is also discovered that the qualities of corporate governance in Taiwan still need to be improved. In sum, this study concludes that weak corporate
governance leads to higher probability of financial distress.
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