Board of Directors and Bankruptcy Risk Using GMM Approach

Motivated by agency theory, we investigate how a firm's overall quality of board of directors reduces its bankruptcy risk. Using 129 listed firms over a period of five (5) years (2017-2021) sample of firms with boards’ data from the MachameRatios, we find that firms with stronger boards exhibit a higher ability to reduce bankruptcy risk. Board of directors’ characteristic show mix results, for example, board independence, board female gender, board size show negative significant effects; board meetings (positive) and board ownership (negative) show insignificant effects. In terms of the three control variables, leverage, firm size and big4 show negative significant effects. The results are consistent with the notion that shareholders of firms with better boards quality are able to force managers to take measures to avoid or reduce bankruptcy risk, thereby ensuring that the going concern remains in place. We employ the Generalized Method of Moments approach to cope with possible endogeneity and still obtain consistent results. Our results are important as they show that corporate boards’ quality does have a palpable impact on critical corporate phases such as bankruptcy risk. This study suffers from some limitations. First, the study sample is limited to only 645 observations. However, this is due to the number of listed firms with balanced data of the Nigerian Exchange. Second, the study period ended in 2021. Third, although this study examines the effect of corporate boards, not all board aspects have been examined in the study model. Nevertheless, this paper is significant to regulators, market players, banks, shareholders, corporate boards, management, lenders (creditors), and a number of other stakeholders. It offers empirical evidence for both policy improvement, performance improvement, future research and it provides additional body of knowledge.