To Give an Insight into Financial Crisis from Corporate Governance

Discussion about corporate governance (CG) mostly centers on corporate performance or the function of the board of directors. In this study, we incorporate external monitoring mechanisms into the analysis of CG to establish a comprehensive set of CG mechanisms. We then combine these mechanisms with financial crises (FCs) to elucidate (1) whether fulfilling CG reduces the risk of an FC when all other factors are controlled and (2) whether poor CG compromises subsequent company operations and causes an FC. In this study, we analyze companies listed on the Taiwan Stock Exchange between 2003 and 2010 except for financial/securities companies. The empirical results show that conventional director and supervisor functions and external monitoring mechanisms influence the 3-year likeliness of an FC. For director and supervisor functions, the 3-year likeliness of an FC simultaneously increases with board size, share pledge ratio of directors and supervisors, and deviation from stock pledge responsibilities of directors and supervisors. For external monitoring mechanisms, the 3-year likeliness of an FC simultaneously increases with a decrease in information disclosure and accountant selection stringency. Moreover, the likeliness of an FC increases once a specific portion of board seats is occupied by independent directors and supervisors. In companies with a chairperson or chief executive officer, the risk of an FC simultaneously decreases with an increase in the shareholding ratio of the chairperson due to the coexistence of interest. Finally, we conduct a subsequent analysis to identify the common predictors in each year of the 3-year research period and adjust the scope of research to reinforce our argument that CG is the cause of FCs