Is corporate governance a better estimator of financial crises than financial ratios?

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Title:	Is corporate governance a better estimator of financial crises than financial ratios?
Authors:	Hung, Chia-Hsin;Lin, Ku-Jun;Hsieh, Yi-Hua
Contributors:	淡江大學會計學系 Department of Accounting, National Chengchi University
Date:	2014-08
Issue Date:	2014-10-28 17:05:58 (UTC+8)
Publisher:	American Accounting Association
Abstract:	In order to provide accurate forecast of financial crises, researcher nowadays argue that leading indicators such as Corporate Governance may be a better estimator than lag indicators such as Financial Ratios. Using sample data from Taiwan Economic Journal (TEJ), this research examines Corporate Governance, Financial Ratios and financial crises information for all public trading companies in Taiwan from 2003 to 2010. Data from financial, banking and security companies are excluded because of the nature of such industries. The empirical evidence suggests that: First, Corporate Governance is a good estimator; compared to Financial Ratios it is also able to forecast a financial crisis earlier and with better accuracy. Second, when a general manager (GM) is also the chairman of the board, the extent of such dual identities’ influence on financial crisis is negatively intervened by the GM’s shareholding ratio. Moreover, auditors with characteristics such as available resources, qualifications and professionalism are better able to serve as estimator of corporate financial crises. Finally, this research considers influence factors from one to three years, and compares models consisting of just one factor vs. a model combining Corporate Governance and Financial Ratios. The result shows that a Composite Index based on Corporate Governance and Financial Ratios may better help determine whether the company would suffer from financial crisis in the future. In addition, the forecasting power of Financial Ratios declines over a three-year period. In terms of the goodness fit for model development, model explanatory power and variable prediction capability, Corporate Governance is a better tool compared to Financial Ratios, and works better with the Composite Index (of Corporate Governance plus Financial Ratios).
Relation:	American Accounting Association 2014 Annual Meeting and Conference on Teaching and Learning in Accounting
Appears in Collections:	[Graduate Institute & Department of Accounting] Proceeding

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