Financial Distress and Corporate Governance: The Impact of Board Configuration

The number of filings for bankruptcy procedures has exploded since 2007 and governance has been pointed outas one of the causes. We took a dataset of 312 US firms and asked the following research question: does theboard of directors configuration have an impact on financial distress? We used a matched-pair sample of USquoted firms with half of the sample filing for Chapter 7 (liquidation) or 11 (reorganization) of the United StatesBankruptcy Code and conducted logit regression analysis. We found that some board size was significantlydifferent for firms that opted for legal protection from those that did not. This study uses corporate governanceperspective to analyse the configuration of the board and its impact on a the decision of a company to resort to abankruptcy protection law. By demonstrating that corporate governance matters in terms of financial distress,this study offers guidance to shareholders and financial institutions.