Analysis and Synthesis of Prior Research (COPRORATE GOVERNANCE) – Project Submission-Presentation

Analysis and Synthesis of Prior Research (COPRORATE GOVERNANCE) – Project Submission-Presentation

CORPORATE GOVERNANCE( TOPIC)

This week, you will submit your final group project for this course.

As a reminder, your project submission should be a PowerPoint presentation that includes a synopsis of the topic, an identification of key concepts, and an annotated bibliography of the journal articles used to research the topic.

As mentioned previously, you can rely on the journal articles provided in the classroom as a starting point for your research. These journal articles can be found under “Optional Resources” in Week 1 for the Corporate Governance topic

You also will be responsible for researching and identifying three new resources from the Walden Library to support your presentation. These resources should be recently published—within the last 3–5 years.

Your annotated bibliography should include the relevant resources provided in this classroom, as well as the three newly identified resources from the Walden Library. For each entry in your annotated bibliography, be sure to address the following as a minimum:

1-Include the full APA citation

2-Discuss the scope of the resource

3-Discuss the purpose and philosophical approach

4-Discuss the underlying assumptions

5-If referring to a research reporting article, identify and discuss the methodology

6-Relate the resource to the body of resources you have consulted in this course

7-Discuss any evident limitations and opportunities for further inquiry

Journal of Accounting, Auditing & Finance 2016, Vol. 31(2) 163–202 The Author(s) 2014 Reprints and permissions: sagepub.com/journalsPermissions.nav DOI: 10.1177/0148558X14560898 jaf.sagepub.com Corporate Governance and Bankruptcy Risk Ali F. Darrat1 , Stephen Gray2 , Jung Chul Park3 , and Yanhui Wu4 Abstract We examine how firm characteristics, particularly the degree of firm complexity and the firm’s need for specialty knowledge, affect the relationship between corporate governance and the risk of bankruptcy. We find that having larger boards reduces the risk of bankruptcy only for complex firms. Our results also suggest that the proportion of inside directors on the board is inversely associated with the risk of bankruptcy in firms that require more specialist knowledge and that the reverse is true in technically unsophisticated firms. The results further reveal that the additional explanatory power from corporate governance variables becomes stronger as the time to bankruptcy is increased, implying that although corporate governance variables are important predictors, governance changes are likely to be too late to save a firm on the verge of bankruptcy. Keywords bankruptcy, corporate governance, board characteristics, CEO characteristics, management characteristics The fall of Enron was a direct result of failed corporate governance and consequently has led to a complete reevaluation of corporate governance practice in the United States . . . —Munzig (2003) Introduction Since the accounting scandals of the early 21st century, ethics and corporate governance issues have increasingly attracted the attention of researchers, practitioners, and policy makers. WorldCom overstated its profits by U.S. $3.8 billion by improperly classifying expenses as investments. Enron, the icon of corporate fraud and corruption, moved debt off 1 Louisiana Tech University, Ruston, USA 2 University of Queensland, Brisbane, Australia 3 Auburn University, AL, USA 4 Queensland University of Technology, Brisbane, Australia Corresponding Author: Jung Chul Park, Auburn University, 303 Lowder Hall, Auburn, AL 36849, USA. Email: jzp0023@auburn.edu Article its own books and presented a misleading financial status. Adelphia, the fifth largest cable company in the United States, collapsed into bankruptcy after it disclosed $2.3 billion in off-balance-sheet debt. Although corporate governance is apparently associated with the risk of bankruptcy, there has been only scant research on the nature of the association grounded on comprehensive empirical tests. The existing studies mainly deal with the link between corporate governance and operating performance or firm value (see J. C. Adams, Mansi, & Nishikawa, 2010; Boone, Field, Karpoff, & Raheja, 2007; Brown & Caylor, 2006; Coles, Daniel, & Naveen, 2008; Duchin, Matsusaka, & Ozbas, 2010; Eisenberg, Sundgren, & Wells, 1998; Fich & Slezak, 2008; Gilson, 1990; Jensen, 1993; Linck, Netter, & Yang, 2008; Lipton & Lorsch, 1992; Masulis & Mobbs, 2011; Shleifer & Vishny, 1997; Weisbach, 1987; Yermack, 1996). However, we posit that the effect of governance is not uniform across all firms and that one-size-fits-all governance practices can be counterproductive. The findings from nonbankrupt (healthy) firms, documented in the above studies, may not explain the effectiveness of certain governance features for situations in which firms are close to becoming financially distressed or bankrupt. There are at least two reasons for this difference. First, governance structures that are effective and useful for some firms can be ineffective and even counterproductive for others. For example, it appears that Enron actually incurred financial leverage to manipulate reported earnings and thus increased agency costs even though debt can discipline management by forcing it to pay out cash rather than overinvesting (Jensen, 1986). Second, firm performance is not a single factor directly causing bankruptcy, and bad performance may not necessarily lead to immediate insolvent status. Bankruptcy is associated with several conditions including a firm’s fixed costs (i.e., operating and financial leverage), sales sensitivity (especially to economic downturns), and the proportion of illiquid assets. There have been a number of studies that link corporate governance to the risk of bankruptcy (e.g., Elloumi & Gueyie, 2001; Fich & Slezak, 2008; Parker, Peters, & Turetsky, 2002). However, most prior studies deal with restricted samples and examine the effects of some corporate governance variables without considering the potential impact of firm-specific characteristics, particularly the degree of firm complexity and firm’s need for specialty knowledge. To fill this gap in the literature, we examine the effect that these firm characteristics have on the relationship between corporate governance attributes (such as board size and director independence) and the risk of corporate bankruptcy. We find that a larger board is likely to reduce the probability of bankruptcy, inconsistent with the suggestion of some studies that larger boards can be less effective than small boards (Eisenberg et al., 1998; Jensen, 1993; Lipton & Lorsch, 1992; Yermack, 1996). Our results further suggest that the reduction in the probability of bankruptcy occurs only when complex firms employ larger boards (Boone et al., 2007; Coles et al., 2008; Linck et al., 2008). These findings imply that a larger board brings to the firm wider networks and knowledge as well as richer experience and expertise. The enhanced advisory capacity of a larger board appears to be relatively more beneficial to more complex firms when they are under serious financial pressure. However, we also find that larger boards are of no benefit to simpler firms, where the more marginal gains from additional advisory capacity seem to be offset by coordination and free-riding problems. Corporate boards have two important functions—monitoring and advising. We find that in circumstances where relatively little specialist knowledge is required to properly 164 Journal of Accounting, Auditing & Finance understand the firm’s operations, firms with a greater proportion of outside directors have a lower probability of bankruptcy. For these firms, the monitoring function of the board is more important, and our findings accord well with the view that outside directors are likely to be superior at this function. Conversely, we find that in situations where relatively more specialist knowledge is required to properly understand the firm’s operations, firms with a greater proportion of inside directors have a lower probability of bankruptcy. This is consistent with the posture that, in more technically sophisticated firms, the advisory function of the board requires more insiders with specialist knowledge. We further examine several other corporate governance attributes that have been linked to operating performance. The evidence we find suggests that the majority of these variables are robustly related to the probability of bankruptcy. For example, our results suggest that firms with more diverse boards (a greater proportion of female representation) are less likely to file for bankruptcy, which is consistent with studies that find a positive link between board gender diversification and operating performance attributable to improved monitoring (R. B. Adams & Ferreira, 2009). In addition, we find that firms with more powerful CEOs, who also serve as board chairman or hold a larger proportion of the firm’s stock, are more likely to file for bankruptcy. This is consistent with the literature that reports a negative relationship between CEO power and operating performance (R. B. Adams, Almeida, & Ferreira, 2005; Daily & Dalton, 1994; Elloumi & Gueyie, 2001). The results also suggest that firms that have recently replaced their CEO are less likely to file for bankruptcy, similar to the evidence of Bonnier and Bruner (1989) who report a significantly positive stock price reaction to the departure of CEOs of poorly performing firms. This implies that CEO departures do not have a signaling role—that there are other sources of information that signal the financial health of the firm and, conditional on poor financial health, the departure of the CEO is a positive development. We also find a negative relationship between CEO tenure and the probability of bankruptcy. Taken together, these results suggest that, when the CEO is not replaced, the firm is better served by a longer standing CEO. Our analysis explores the marginal ability of corporate governance attributes to assist in the prediction of corporate bankruptcies beyond traditional bankruptcy prediction models based on accounting ratios and firm characteristics. As expected, we find that firms are more likely to file for bankruptcy if they are less profitable, more highly leveraged, smaller, and have more volatile returns. The corporate governance variables that we examine achieve significant explanatory power beyond the accounting ratios and firm characteristics. Finally, the evidence we obtained suggests that the additional explanatory power gained from adding corporate governance variables becomes stronger as the time to bankruptcy is increased, suggesting that while corporate governance characteristics are important, they have a longer term effect and cannot by themselves save a firm on the verge of bankruptcy. Although accounting ratios echo current firm performance, corporate governance factors reflect the framework within which the firm operates, which is likely to have an effect that plays out over a longer time horizon. The remainder of this article proceeds as follows. The next section develops our hypotheses. In the ‘‘Data and Measurement of Variables’’ section, we discuss the data sources and sample construction. The ‘‘Empirical Results’’ section presents our empirical results, and the last section concludes. Darrat et al. 165 Hypotheses Development The main purpose of this study is to examine how the relationship between corporate governance and the risk of bankruptcy is affected by firm-specific characteristics such as the degree of firm complexity and the firm’s need for specialty knowledge. The two primary functions of the board of directors are the monitoring and advisory roles. The independence of the board has been specifically linked to the monitoring function and the board size has been linked to the advisory function. The literature focuses mainly on the monitoring role of the board and generally reports that an efficient internal monitoring mechanism reduces agency problems and improves managerial efficiency. It is also generally suggested that smaller boards are more efficient in the monitoring role due to better coordination and less free-riding (Jensen, 1993; Lipton & Lorsch, 1992). In relation to the advisory role, Dalton and Daily (1999) find that large and diversified boards generally provide better advice to the CEO. Hermalin and Weisbach (1988) report that independent directors offer better advice, but Duchin et al. (2010) and Coles et al. (2008) find that operating performance only benefits from the advice of outside directors in cases where it is relatively easier for them to learn more about the firm. These results suggest that there may be a trade-off between the monitoring role of the board (which may benefit from smaller numbers) and the board advisory function (which may benefit from larger numbers and greater independence in some circumstances). A theoretical rationale behind the effect of board size on the risk of bankruptcy is that firms face two types of information asymmetries (endogenous vs. exogenous) and the mechanisms in mitigating each type of information asymmetry are different (De Groote, 1990). The monitoring function of the board deals with endogenous hidden information produced from consequent managerial decisions within the firm. In contrast, the advising function of the board is more likely to mitigate the exogenous hidden information that is independent of the firm decisions. It is plausible that both types of information asymmetry affect more complex firms, whereas endogenous issues are more relevant for less complex firms. We argue that large boards are better in solving the exogenous information asymmetry but weaker in endogenous issues. Therefore, large boards may function better for complex firms, while small boards are more efficient in solving the endogenous hidden information in simpler firms via their monitoring function.1 Coles et al. (2008) contend that the literature often overlooks the advisory role of the board despite its profound importance in certain circumstances. They suggest that complex (simple) firms with larger (smaller) boards perform better due to greater (less) advisory requirements. This proposition receives empirical support in Boone et al. (2007) and Linck et al. (2008). In contrast, other studies find smaller boards to be more effective in monitoring tasks (e.g., Fich & Slezak, 2008; Jensen, 1993; Yermack, 1996). These authors argue that, unlike large boards with high coordination costs, smaller boards are more cohesive and have fewer free-rider problems and are thus able to monitor more effectively. Yermack (1996) reports a negative relationship between board size and Tobin’s Q, while Fich and Slezak (2008) contend that distressed firms with smaller boards are more likely to avoid bankruptcy. In summary, the literature has established a link between board size and the likelihood of bankruptcy and further suggests that optimal board size is related to firm complexity. We bring these two strands of literature together in our first hypothesis, which posits that a firm is more likely to fail if it has a board size that is inappropriate to its circumstances: 166 Journal of Accounting, Auditing & Finance Hypothesis 1 (H1): Other things being equal, complex (simple) firms are more likely to fail if they have smaller (larger) boards. Another key feature of board composition is the degree of independence. It is generally presumed that boards with greater independence are more effective in performing the monitoring role of the board. For example, Nguyen and Nielsen (2010) investigate stock price reactions to sudden deaths and conclude that independent directors are generally viewed as being beneficial to the firm. Byrd and Hickman (1992) report that independent boards are more likely to remove CEOs because of poor performance and Fich and Slezak (2008) suggest that firms with more independent boards are better able to avoid bankruptcy after entering distress. However, other studies suggest that the link between board independence and the advisory function also depends on the specific circumstances of the firm. Duchin et al. (2010) argue that greater board independence may adversely influence the firm performance when it is difficult for independent directors to acquire information about the firm. Coles et al. (2008) report that outside directors contribute to the board advisory function if the firm has multiple business units or extensive relationships with external parties, but that inside directors make a superior contribution to the advisory function where the firm’s operations are technically more sophisticated and require specialist knowledge. In sum, in circumstances where specialist knowledge is required to properly understand the firm’s operations, there seems to be a trade-off between increasing board independence to support the board monitoring function and increasing the proportion of insiders to support the board advisory function—for a given board size. As bankruptcy is an indication (or an outcome) of firm performance, we postulate that, in circumstances where relatively little specialist knowledge is required to properly understand the firm’s operations, firms with a greater proportion of outside directors have a lower probability of bankruptcy. For these firms, the monitoring function of the board is more important. Conversely, we postulate that in circumstances where relatively more specialist knowledge is required to properly understand the firm’s operations, firms with a greater proportion of inside directors have a lower probability of bankruptcy. The advisory function of the board requires more insiders with specialist knowledge in these types of firms. We examine this formally through our second hypothesis: Hypothesis 2 (H2): Other things being equal, firms whose operations require more (less) specialist knowledge are more likely to fail if they have a smaller (greater) proportion of inside directors. Data and Measurement of Variables Data Sources and Sample Selection We compile our firm bankruptcies data from various sources including UCLA-LoPucki Bankruptcy Research Database (http://lopucki.law.ucla.edu/), New Generation Research (www.bankruptcydata.com), Compustat, and the Center for Research in Security Prices (CRSP). The sample contains listed Compustat firms and covers a 10-year period from 1996 to 2006 because the Investor Responsibility Research Center (IRRC) data start from 1996. Following prior research, we classify a firm as being bankrupt if it makes a Chapter 11 filing. We obtain accounting data such as firm diversification and financial ratios from Darrat et al. 167 Compustat, and CRSP provides daily and monthly data on stock returns. We hand collect most of the corporate governance data of bankrupt firms from SEC.GOV text files and data for nonbankrupt firms from IRRC. Following Begley, Ming, and Watts (1996), we assume that annual financial statements are available by the end of the fourth month after the firm’s fiscal year-end. For each bankrupt firm, the end of the last fiscal year must be at least 4 months prior to bankruptcy. If it is within 4 months, we treat the previous year’s financial statements as the last available observation. We have 67,095 observations (11,511 firms) with valid accounting and market data.2 For compatibility with previous studies (e.g., Begley et al., 1996; Shumway, 2001), we exclude firms with a Standard Industrial Classification (SIC) code between 6000 and 6999 (financial firms). Thus, we exclude firms in the financial services and real estate sector whose financial structures appear quite different from the rest of the firms in our sample.3 This process results in 14,328 observations and 2,443 firms being excluded from the sample. There are 11,116 firm-year observations (1,972 firms) that have both corporate governance data and accounting data available. We exclude firms that are delisted from CRSP or deleted from Compustat for reasons other than bankruptcy or liquidation. We also delete firms with board size smaller than three to guard against possible errors in data entry (3 observations were excluded on this basis). The final sample includes 217 bankrupt firms with accounting and corporate governance data 1 year prior to bankruptcy.4 Among the bankrupt firms, 186 firms have data more than 2 years prior to bankruptcy. For those bankrupt firms without an exact filing date, we treat their delisting date from CRSP or Compustat (whichever comes first) as the bankruptcy date. All estimations are on a yearly basis. The final sample also contains 9,100 nonbankrupt (healthy) firm-years excluding years for bankrupt firms. Accounting and Market-Based Variables Our base model uses constructs similar to Campbell, Hilscher, and Szilagyi (2008) for the role of accounting and market-based control variables. The accounting variables reflect profitability, liquidity, and leverage; and the market-based variables reflect past excess stock returns, idiosyncratic risk, firm size, market to book ratio and fiscal year-end closing price. Consistent with prior research, we expect that more profitable and liquid firms should exhibit a lower probability of bankruptcy while higher leverage increases the probability of bankruptcy. We also expect that larger firms with low market to book ratio, higher stock returns, and lower volatility have a lower probability of bankruptcy. Firm Complexity Coles et al. (2008) and Linck et al. (2008) suggest that a firm’s level of complexity depends on three dimensions: scope of operations, size, and leverage. A diversified firm tends to be more complex and thus requires a greater range of advice from the board of directors (Hermalin & Weisbach, 1988). Yermack (1996) shows that more complex firms tend to have larger boards. Large firms are also more complex because they often have more external contracting relationships (Booth & Deli, 1996) and thus have greater advisory requirements and a need for larger boards (Pfeffer, 1972). Klein (1998) also argues that firms with high leverage are likely to have greater advisory needs because they rely more on external resources. These contentions also find empirical support in Linck et al. 168 Journal of Accounting, Auditing & Finance (2008). Following Coles et al. (2008), and Linck et al. (2008), we employ a principal components analysis to produce for each firm-year observation a complexity score based on the number of business segments, log (sales), and leverage (defined as total liabilities to market value of assets). We define any firm as ‘‘complex’’ if its complexity score is above the median value, and the firm is deemed to be ‘‘simple’’ otherwise. Specialty Knowledge Independent of firm breadth, size, and leverage, the operations of some firms are more technically demanding thus requiring specialist knowledge, whereas other firms’ operations are more straightforward. Prior literature suggests two ways of measuring the cost of acquiring information. First, Coles et al. (2008) use R&D expenditure as a proxy for the specialist knowledge required to understand the firm’s operations. Second, Duchin et al. (2010) use the availability, homogeneity, and the accuracy of analysts’ earnings forecasts in Krishnaswami and Subramaniam (1999) to measure the information about the firm that is available to outsiders. Both Coles et al. (2008) and Duchin et al. (2010) show that operating performance is positively related to the appointment of outsiders in firms that have low R&D and for which there are more consistent analyst forecasts. These findings indicate that outside directors have a positive effect when it is easier to become informed about the firm’s operations. In this article, we follow Coles et al. (2008) and use R&D expenditure to measure the extent to which directors require specialist knowledge. In particular, we develop an R&D dummy variable that is assigned a value of 1 if the firm’s R&D intensity (i.e., R&D expenditures scaled by total assets) is higher than the 75 percentile and 0 otherwise. Board Diversification R. B. Adams and Ferreira (2009) argue that diversified boards in gender (consisting of both men and women) provide more effective monitoring that could enhance management efficiency. We measure board diversification by the proportion of female directors and expect that firms are more likely to fail if the board is less diversified in gender. CEO Power R. B. Adams et al. (2005) argue that the volatility of stock returns is higher for firms run by powerful CEOs who are also either the founder of the firm or the board chairman. Daily and Dalton (1994) and Elloumi and Gueyie (2001) find that a duality of roles (a CEO also serving as the board chairman) is relatively more common in bankrupt firms. This suggests a positive relationship between CEO power concentration and the probability of bankruptcy. We measure CEO power concentration in two ways. First, we construct a dummy variable that is set to one if the CEO also serves as board chairman. Hambrick and D’Aveni (1992) find that the probability of bankruptcy increases with the degree of CEO dominance. Daily and Dalton (1994) examine the relationship between governance structure and corporate bankruptcy and report that bankrupt firms are more likely to have CEOs serving simultaneously as the board chairman, compared with a sample of matched firms. Therefore, we expect a positive association between the duality of roles and the probability of bankruptcy. Second, we measure the proportions of the firm’s stock that are owned by the CEO (CEOs who own greater proportions of the firm’s stock are considered to be more Darrat et al. 169 powerful). Myers (1977) contends that equity ownership and option compensation may induce management to engage in value decreasing risk shifting behavior when a firm is distressed. Therefore, we expect a positive association between the CEO stockholding and the probability of bankruptcy. Management Stability The past literature on the relationship between bankruptcy risk and management stability suggest both directions. On one hand, turnover in senior management ranks is relatively more common in firms filing for bankruptcy or privately restructuring their debts to avoid bankruptcy. Gilson (1989) finds that 52% of sampled firms that file for bankruptcy experience a senior management change. Hambrick and D’Aveni (1992) insist that poor organizational performance leads to CEO departure, which includes voluntary departures for better rewards, voluntary departures to avoid stigma, and purposive attempts to modify the team. Schwartz and Menon (1985) report that 45% of bankrupt firms change CEOs compared with 19% of control firms. Daily and Dalton (1995) find that the likelihood of bankruptcy more than doubled for financially distressed firms that have their CEOs replaced by outsiders, relative to a matched sample of solvent firms. Parker et al. (2002) find that firms replacing their CEO with an outsider are more than twice as likely to experience bankruptcy. Therefore, this stream of the literature suggests that replacing CEOs might indicate the firm’s unhealthy financial situation. On the contrary, we note that stock prices tend to react positively to the announcement of top management turnover in poorly performing firms (Bonnier & Bruner, 1989). This is consistent with the notion that the removal of incumbent managers enhances the firm’s prospects of being able to improve future performance. As to bankruptcy prediction, it is unlikely that the departure of the CEO has a significant signaling effect in relation to the financial health of the firm as there are other sources of more direct information on the firm financial condition. If this is the case, it is likely that, conditional on poor financial health, the departure of the CEO is a positive development that would reduce the probability of bankruptcy. We measure management stability in two ways. First we construct a dummy variable that is set to one if the firm has replaced its CEO within the previous 3 years. Hill and Phan (1991) find that CEOs with longer tenure may become too powerful, with an adverse effect on firm performance. Therefore, we measure the tenure of current CEOs. Whereas a long-serving CEO may negatively affect the operating performance of a firm, the types of expropriation identified by Hill and Phan (1991) are less likely to be tolerated (or even possible) as the firm becomes more distressed. Rather, as the financial performance of the firm declines, it becomes more likely that its senior management will be replaced. Given that the incumbent CEO is not replaced, it may be that the firm is better served by a longer standing CEO. Ultimately, this is an empirical question that we address in this article. Empirical Results Summary Statistics Table 1 reports summary statistics for all explanatory variables in the model. The mean values are reported in bold if they are significantly different between the bankrupt and nonbankrupt subsamples at the 5% level or better. We winsorize all data on accounting and firm characteristics at the 1st and the 99th percentiles. One may think that distressed firms 170 Journal of Accounting, Auditing & Finance Table 1. Summary Statistics. Bankruptcies Nonbankruptcies (N = 9,100) Bankrupt in 1 year (n = 217) Bankrupt in 2 years (n = 186) Variable M Median SD M Median SD M Median SD Accounting ratios and other firm characteristics NIMTA 0.02 0.03 0.06 20.16 20.09 0.17 20.07 20.02 0.13 TLMTA 0.34 0.31 0.21 0.68 0.76 0.24 0.56 0.63 0.27 CASHMTA 0.07 0.03 0.09 0.07 0.03 0.11 0.07 0.03 0.10 EXRET 0.06 0.00 0.46 20.39 20.55 0.52 20.14 20.36 0.68 SIGMA 0.10 0.09 0.06 0.22 0.19 0.09 0.20 0.18 0.09 SIZE 28.66 28.80 1.53 211.76 211.94 1.40 211.20 211.27 1.52 MB 0.95 0.87 0.73 0.24 0.07 1.10 0.49 0.31 1.08 PRICE 3.27 3.36 0.73 1.28 1.12 0.96 1.85 1.81 1.01 SEGMENTS 6.32 4.00 5.11 3.43 2.00 3.47 4.39 3.00 3.64 SALES ($billions) 4,760 1,432 11,143 1,618 285 7,400 1,486 290 4,324 R&D 0.03 0.00 0.06 0.05 0.00 0.17 0.04 0.00 0.14 Corporate governance factors Board size 9.25 9.00 2.52 7.46 7.00 2.24 7.60 7.00 2.45 Insider director fraction 0.20 0.17 0.11 0.24 0.20 0.14 0.25 0.20 0.14 Outsider 0.66 0.67 0.17 0.57 0.57 0.20 0.54 0.57 0.20 Female director fraction 0.09 0.09 0.09 0.05 0.00 0.09 0.05 0.00 0.08 (continued) 171 Table 1. (continued) Bankruptcies Nonbankruptcies (N = 9,100) Bankrupt in 1 year (n = 217) Bankrupt in 2 years (n = 186) Variable M Median SD M Median SD M Median SD CEO/chairman duality 0.51 1.00 0.50 0.56 1.00 0.50 0.60 1.00 0.49 CEO shareholding (%) 2.14 0.27 5.69 3.81 0.35 8.78 4.98 0.60 10.50 CEO turnover 0.32 0.00 0.47 0.41 0.00 0.49 0.41 0.00 0.49 CEO tenure 8.28 6.00 7.49 6.24 5.00 5.42 6.48 5.00 5.02 CEO age 55.59 56.00 7.30 52.81 54.00 8.02 53.02 53.00 8.50 CEO option value/total compensation 0.52 0.57 0.28 0.22 0.00 0.32 0.23 0.00 0.32 Insider shareholding (%) 6.37 1.59 13.21 16.94 8.06 23.32 16.02 7.33 20.87 Institutional block holding (%) 16.09 14.37 13.18 24.06 19.73 21.71 22.32 19.64 19.27 Independent audit committee dummy 0.63 1.00 0.48 0.48 0.00 0.50 0.47 0.00 0.50 Note. This table reports summary statistics for all variables over the period 1996 to 2006. The sample contains 217 bankruptcies (186 bankruptcies with 2 years of prior data) and 9,100 nonbankrupt firm-year observations. NIMTA = the ratio of net income to the market value of total assets; TLMTA = the ratio of total liabilities to the market value of total assets; CASHMTA = the ratio of cash and short-term assets to the market value of total assets; EXRET = cumulative annual return in year t minus the value-weighted CRSP NYSE/ AMEX return in year t; CRSP = Center for Research in Security Prices; SIGMA = standard deviation of the residual derived from regressing monthly stock return on market return in year t; SIZE = log of the ratio of firm’s market capitalization to the total market capitalization of all firms; MB = the ratio of market value equity to book value equity; PRICE = log of closing price at end of previous fiscal year; SEGMENTS = the number of business segments in the firm; SALES = the amount of gross sales; R&D = the ratio of research development expenditures to total assets; Board size = the number of directors; Inside director fraction = proportion of inside directors; Female director fraction = proportion of female di

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