Effects of External Corporate Governance Mechanism on Financial Distress Risk: Evidence from Chinese Listed Firms

We explore the effects of external corporate governance measures on financial distress risk for the non-financial listed firms in China. For empirical analysis, we use panel regression models to handle the panel data collected from the CSMAR for 2010-2020. As a proxy for the financial distress risk or dependent variable, we employ the Z-score (Altman, 1968) which measures the financial distress risk inversely. As measures for external corporate governance mechanism or explanatory variables, we choose product market competition, control market competition, bank borrowing ratio, external audit, government supervision, supplier trust and customer support. In addition, we take three control variables, namely, company size, listing period, and operating profit ratio. Overall, our findings are largely consistent with prior studies, showing that the external corporate governance mechanism exert significant influence on financial distress risk. Among the independent variables, product market competition, external audit, supplier trust and customer support have a significant positive relationship with financial distress risk, while bank borrowing ratio has a significant negative association with the financial distress risk. Of the control variables, firm size and operating profit ratio are positively associated with the financial distress risk, while listing period is negatively associated with the financial distress risk of the company. These findings would be useful for corporate decision makers, institutional and individual investors, and government policymakers in devising investment strategy and government policies to alleviate the likelihood of financial distress risk.