Corporate governance and default risk of firms cited in the SEC’s Accounting and Auditing Enforcement Releases

Corporate governance and default risk of firms cited in the SEC’s Accounting and Auditing... We examine the relationship between corporate governance and default risk for a sample of firms cited in the Securities and Exchange Commission’s Accounting and Auditing Enforcement Releases (AAERs). Using hazard analysis of actual default incidence and OLS regressions of a continuous variable capturing a firm’s “closeness to default,” we document changes in the relationships between various governance characteristics and default risk from the pre-AAER period to the post-AAER period. Specifically, smaller board size, greater board independence, greater gender diversity of the board, and lower concentration of institutional ownership are all shown to have a more favorable effect on lowering default risk in the post-AAER period relative to the pre-AAER period. Our comparative analysis of a group of firms with accounting restatements (but not cited in the AAERs) does not show similar changes in the relationships between the various corporate governance characteristics and default risk from the pre-restatement to the post-restatement period. This suggests that the regulatory sanctions experienced by AAER firms may have prompted creditor reevaluation of the firms’ information environment and the perceived efficacy of various corporate governance mechanisms in mitigating default risk. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Corporate governance and default risk of firms cited in the SEC’s Accounting and Auditing Enforcement Releases

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0401-9
Publisher site
See Article on Publisher Site

Abstract

We examine the relationship between corporate governance and default risk for a sample of firms cited in the Securities and Exchange Commission’s Accounting and Auditing Enforcement Releases (AAERs). Using hazard analysis of actual default incidence and OLS regressions of a continuous variable capturing a firm’s “closeness to default,” we document changes in the relationships between various governance characteristics and default risk from the pre-AAER period to the post-AAER period. Specifically, smaller board size, greater board independence, greater gender diversity of the board, and lower concentration of institutional ownership are all shown to have a more favorable effect on lowering default risk in the post-AAER period relative to the pre-AAER period. Our comparative analysis of a group of firms with accounting restatements (but not cited in the AAERs) does not show similar changes in the relationships between the various corporate governance characteristics and default risk from the pre-restatement to the post-restatement period. This suggests that the regulatory sanctions experienced by AAER firms may have prompted creditor reevaluation of the firms’ information environment and the perceived efficacy of various corporate governance mechanisms in mitigating default risk.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 22, 2013

References

  • Women in the boardroom and their impact on governance and performance
    Adams, R; Ferreira, D
  • The role of information and financial reporting in corporate governance and debt contracting
    Armstrong, C; Guay, W; Weber, J
  • Have financial statements become less informative? Evidence from the ability of financial ratios to predict bankruptcy
    Beaver, W; McNichols, M; Rhie, J
  • Forecasting default with the Merton distance to default model
    Bharath, S; Shumway, T
  • Corporate governance myths: comments on Armstrong, Guay, and Weber
    Brickley, J; Zimmerman, J
  • Corporate governance and firm operating performance
    Brown, L; Caylor, M
  • In search of distress risk
    Campbell, J; Hilscher, J; Szilagyi, J
  • CEO involvement in selecting board members, audit committee effectiveness, and restatements
    Carcello, J; Neal, T; Palmrose, Z-V; Scholz, S

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