Financial Systems in Troubled Waters

Alessandro Carretta, Gianluca Mattarocci

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136232237
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This collection considers the financial crisis from a managerial perspective, focussing on the business implications for the financial industry. Topics examined include governance, information needs and strategy of financial intermediaries and investors. The contributions build on the existing literature and present some unique insights on governance, credit quality evaluation and performance measurement.

In a fast growing or steady market, it is possible for even an inefficient financial system to satisfy investors' and firms' needs. However, the current financial crisis has brought into sharp relief the limits of the inefficient practices adopted by the market, and made clear the importance of developing more effective governance mechanisms, more detailed and complete information databases and new strategies. The crisis has also brought to the fore issues about the governance of financial intermediaries that had not been previously addressed. These include board diversity, internal monitoring procedures and the existence of interlocking directorates.

More broadly, the financial crisis has radically altered the international framework, with an increasingly consolidated financial sector, and the rise of new markets (such as China) that now play a predominant role in the worldwide market. Studies on the competition and on the performance in this new scenario are essential in order to understand the implications of recent events.

Part I
Governance is not at issue, or is it?

1
Boards of directors in troubled waters!

Enhancing the survival chances of distressed firms

Gianpaolo Abatecola, Vincenzo Farina and Niccolò Gordini

1 Introduction

Can particular characteristics of the board of directors positively affect the survival chances of distressed firms? How has the empirical research on this topic evolved over the years? How have the statistical techniques been developed? These research questions are receiving ever growing interest among the scholars of management and corporate finance; addressing these research questions is particularly challenging today because of the recently inherited dramatic consequences – both at macro, meso and micro level – of the global financial crisis.

Corporate crisis and turnaround are often regarded as the two most relevant sub- domains within the evolving research on corporate distress. On the one hand, although a comprehensive definition of crisis is still missing in the literature to date, there is a broad consensus on its meaning, which is a situation of continued negative profitability that puts firms at the risk of being excluded from their competitive environment. On the other hand, turnaround has been defined in various ways, such as merely surviving or, differently, definitely regaining sustainable competitive advantage. Nonetheless, it is of common knowledge that both these research sub- domains have focused mainly on firms whose survival is significantly challenged. For the scope of this chapter, the term ‘corporate distress’ is used to embrace both.

Over the years, scholars have developed a plethora of heterogeneous research perspectives to investigate distress related issues. For the most part, attention has been given to studying its determinants and to planning interpretative models for its ex ante prevention (e.g. Argenti 1976; Altman 1983) and for its ex post recovery (e.g. Bibeault 1982; Stopford and Baden-Fuller 1990; Donaldson 1994). Along with the wider evolution of the research on corporate governance, scholars have also devoted increasing time to empirically exploring the relationship between distress and boards of directors (e.g. D’Aveni 1989; Filatotchev and Toms 2003; Carpenter et al. 2004; Hambrick et al. 2008).

Nowadays, the board–distress empirical debate seems mature enough to warrant a systemic discussion, as advancements within this field have generally suggested that particular board features can have a role in enhancing the survival chances of distressed firms. Still, the extant empirical evidence appears currently fragmented and this is why systematizing its research results seems particularly relevant. Thus, this chapter aims at contributing to fill this gap through presenting the results from a systematic literature review performed on the investigated topic. In particular, the design of the chapter has been specifically conjectured to evidence those results which, from the study, can prospectively provide all the interested practitioners with useful food for thought. Also, the presented results can offer fruitful insights to all those scholars currently committed in developing new research avenues within the board–distress debate.

The chapter shows that understanding the impact of certain board variables (i.e. single socio- demographic features, board size and CEO duality) has produced convergent results, although the extant literature is still limited. Instead, variables, such as board and CEO turnover, have not produced conclusive results, although researchers have devoted considerable time to these variables. Board independence constitutes the sole exception, since the amount of observations is significant and most of the studies agree that the presence of outside directors can enhance corporate turnaround.

The chapter is structured as follows. First, the review methods are highlighted. Second, the main results are outputted, in terms of topic evolution over time, clusters of arguments, board observations and statistical techniques used in the selected publications. Third, some possible developments of the reported study are proposed.

2 Methods

As the main goal of the study was to primarily address the what and how questions about the content of the evolving empirical literature on the board–distress debate, the specific research criteria basically conformed to those adopted by other recent systematic reviews within the management field (e.g. David and Han 2004; Newbert 2007). In particular, this review focused only on double peer- reviewed journal articles, regardless of their impact factor. The computer based research was performed in December 2009, by using the academic journals within the EBSCO-Host and JSTOR databases.

Choosing the most suitable research keywords mostly derived from the reading of leading books (e.g. Cameron et al. 1988; Miller 1990) and articles (e.g. Lorhke et al. 2004; Mellahi and Wilkinson 2004) on corporate distress. In the first phase, a search was executed for all the publications containing the terms ‘distress’ or ‘cris*’ or ‘decline*’ or ‘default*’ or ‘restructur*’ or ‘bank-ruptc*’ or ‘turnaround*’ or ‘surviv*’ as the primary key word in their abstract. The asterisk at the end of a keyword allowed for different suffixes (e.g. ‘crisis’ or ‘crises’). This phase outputted 59,105 results.

In the second phase, the substantive relevance of the articles was ensured by requiring that the articles selected in the previous phase also contained at least one of the following key words (‘firm*’ or ‘corporat*’ or ‘enterprise*’) in their abstract. This phase outputted 10,191 results.

In the third phase, the articles’ relevance was ensured by requiring that those articles selected in the second phase also contained at least one of the following seven keywords (‘board*’ or ‘director*’ or ‘entrepreneur*’ or ‘top management team’ or ‘CEO’ or ‘Chief ’ or ‘TMT’) in their abstract. This phase outputted 966 results.

In the fourth phase, in order to ensure the empirical content of the articles, it was decided to select only those articles that, from the third phase, contained, at least, one of the following methodological keywords in their abstract: ‘empirical’ or ‘statistic*’ or ‘quantitative’ or ‘event history’. This criterion warrants additional discussion. It is evident that the keywords selected in this phase deliberately determined the exclusion of both conceptual articles (e.g. Hoskisson and Turk 1990) and case studies (e.g. Abatecola 2009). The reasons for their exclusion are similar: conceptual articles do not pertain to the empirical scope of the review; similarly, case studies and qualitative analyses were excluded because, as it has been recently observed (Newbert 2007) there is no systematic way to code the results of such studies in a way that is comparable to the results of quantitative analyses. This phase outputted 77 results.

In the fifth phase, the articles selected in the fourth phase were further scanned by reading all their abstracts and texts for substantive context and empirical content, thus controlling their connection with the research topic. Two ‘fit for purpose’ criteria (Denyer et al. 2008) were specifically adopted for determining the final relevance of the articles, thus for deciding their inclusion/exclusion within/from the dataset. In particular, it was decided to include only those articles that, contemporarily, meet the following two criteria: (a) in the articles, a situation of corporate distress (crisis or turnaround) had to be formally associated with the sampled firms and, in particular, the text of the articles had to explicitly associate the sampled firms with bankruptcy procedures (e.g. Chapter 11). If this formal association was absent, the words used by the author(s) in the text had to associate, with no doubt, the sampled firms to high risks of final mortality; (b) the articles had to explicitly test the possible association between corporate distress and, at least, one of the main board variables generally used by corporate governance scholars over the years. As it was recently observed (Aguilera and Jackson 2010; Carretta et al. 2011, Abatecola et al., forthcoming), these variables are board size, board independence, board socio-demographic features and/or personality traits, board turnover, CEO turnover, and CEO duality. Thus, in this phase, all those articles that were related to the board–distress relationship, but did not strictly meet both these criteria, were excluded (e.g. Ciampi and Gordini 2009; Vallini et al. 2009). This phase outputted 40 results. Finally, in the sixth and last phase, the ‘snowballing’ technique was adopted for supporting (and eventually integrating) the results from the previous phases.

3 Results

The final population of this review is composed of 40 quantitative articles¹ published from 1985 to 2009, this size is consistent with that identified in a number of other systematic assessments recently published in reputable journals (e.g. Cafferata et al. 2009; Abatecola et al. forthcoming; Mari and Poggesi forthcoming).

In the population, 20 articles (or 50 per cent) constitute a single sample of firms that filed for bankruptcy, and 20 articles (or 50 per cent) present matching samples. Most of the matching samples (N = 15, or 75 per cent) are composed of bankrupt/non-bankrupt firms, followed by turnaround/non- turnaround firms (N = 3, or 15 per cent). According to the firm business sector, size and number of observations, 15 matching samples are completely equal. In one matching sample, the number of observations is different (45 bankrupt and 88 non-bankrupt firms), size and business sector being equal. Two matching samples present the same number of observations, but vary per firm size and business sector. Finally, in two samples, business sector, size and number of observations are different.

Declared in all the articles, the observation period is seven years on average. Based on the break- through article by D’Aveni (1989), four other articles use the same observation period, which is from 1972 to 1982. The longest observation period is 19 years, while the shortest is only five months. Of the articles, 25 (or 62.5 per cent) are based on American data, five articles (or 12.5 per cent) use European data and ten articles (or 25 per cent) use data from other countries or do not declare the geographical source of data. While most of the articles (N = 21, or 53 per cent) do not specify the sample business sector, the other articles classify their sample as ‘industry’ (N = 15, or 37 per cent) or ‘service’ (N = 4, or 10 per cent). The industry label is usually related to manufacturing activities.

The articles within the dataset are published in 26 international journals. As for the journal ranking, by coding these articles through the 2010 Association of Business School Academic Journal Quality Guide,² 31 hits (or 78 per cent) appear in top journals: 24 (o...

Table of contents

• Cover Page
• Half Title page
• Routledge international studies in money and banking
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• List of contributors
• Preface
• Introduction
• Part I Governance is not at issue, or is it?
• Part II New roles in credit quality assessment
• Part III Competition and efficiency Do they still work in addressing performance?
• Index