Loughborough University
Thesis-2013-Appiah.pdf (4.92 MB)

Corporate governance and corporate failure: evidence from listed UK firms

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posted on 2013-11-18, 12:15 authored by Kingsley O. Appiah
This study is motivated by the numerous reforms to strengthen the efficacy of corporate boards and their oversight committees, in the wake of high profile corporate failures. The empirical question, however, is whether recent proposals would enhance board and their committee effectiveness and in this way, reduce the likelihood of firm`s failure. This study examines whether the composition, structure and functions of corporate boards and their interactions are related to the probability of corporate failure. Prior studies employ agency and resource dependency theories in isolation as theoretical lenses. This study, however, employs these aforementioned theories as theoretical lenses and argues that the board control and resource function affects the relationship between corporate board attributes and corporate failure. This study examines a sample of 358 UK listed firms, consisting of 95 failed firms and 263 non-failed firms during the period 1999-2011. This study also uses a unique hand-collected data set that measures the corporate governance attributes and functions of these 358 firms over a period of five years preceding failure or otherwise, resulting in 1748 firm-years observations. This study reveals that the probability of failure is lower in firms with large board size, former government officials, independent remuneration committee chairman and greater proportion of outside directors as well as effective audit and remuneration committees. This study also finds that the prospect of corporate failure is higher in firms with less than three independent NEDs on both the audit and nomination committees, without audit committee and where audit committee has no one with financial expertise. The results, however, suggest that the possibility of corporate failure is higher in firms whose boards have a female director and where the nomination committee meets often or where its membership is exclusively preserved for independent NEDs. On the interaction effects, the results show that frequency of board meetings as well as its interactions with presence of female directors, audit and remuneration committees effectiveness are positively related to the probability of corporate failure. The results also indicate that a number of interactions between corporate board attributes and functions are unrelated to the likelihood of corporate failure. These include the interactions between board composition measures (i.e. proportion of outside directors, presence of female directors and board size) and the board resource proxy (i.e. former government official). These associations, especially remuneration committee effectiveness, remuneration committee chairman independence, firm size and profitability, are not only statistically and economically significant but also robust to different specifications. Further, the Receiver Operating Curves indicate that the impact of corporate governance measures after controlling for firm size, liquidity, profitability, age, industry effects, and leverage is more profound in two years preceding failure. The implication of this is that corporate governance mechanisms alone are insufficient to rescue the firm on the verge of collapse. The findings are consistent with the idea that failing firms decline in size, managerial performance, corporate board attributes as well as their board`s ability to discharge it`s monitoring and resource roles. This study adds to the debate on the impact of corporate governance on corporate failure by developing, analysing and testing a robust UK corporate failure prediction model which is underpinned by a multi-theoretical framework: agency and resource dependency theories. This study also offers several recommendations for policy makers and firm-level corporate governance strategies in the mix of the numerous corporate governance reforms worldwide, this in particular makes this study unique.



  • Business and Economics


  • Business


© K.O.Appiah

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A Doctoral Thesis. Submitted in partial fulfilment of the requirements for the award of Doctor of Philosophy of Loughborough University.

EThOS Persistent ID



  • en