IDEAS home Printed from https://ideas.repec.org/a/eee/bracre/v46y2014i3p215-227.html
   My bibliography  Save this article

Board composition, grey directors and corporate failure in the UK

Author

Listed:
  • Hsu, Hwa-Hsien
  • Wu, Chloe Yu-Hsuan

Abstract

This study examines the effect of board composition on the likelihood of corporate failure in the UK. We consider both independent and non-independent (grey) non-executive directors (NEDs) to enhance our understanding of the impact of NEDs' personal or economic ties with the firm and its management on firm performance. We find that firms with a larger proportion of grey directors on their boards are less likely to fail. Furthermore, the probability of corporate failure is lower both when firms have a higher proportion of grey directors relative to executive directors and when they have a higher proportion of grey directors relative to independent directors. Conversely, there is a positive relationship between the likelihood of corporate failure and the proportion of independent directors on corporate boards. The findings discussed in this study support the collaborative board model and the view that corporate governance reform efforts may have over emphasised the monitoring function of independent directors and underestimated the benefits of NEDs' affiliations with the firm and its management.

Suggested Citation

  • Hsu, Hwa-Hsien & Wu, Chloe Yu-Hsuan, 2014. "Board composition, grey directors and corporate failure in the UK," The British Accounting Review, Elsevier, vol. 46(3), pages 215-227.
    • Handle: RePEc:eee:bracre:v:46:y:2014:i:3:p:215-227
    DOI: 10.1016/j.bar.2013.12.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0890838913000899
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.bar.2013.12.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    2. Peel, M. J. & Peel, D. A., 1988. "A multilogit approach to predicting corporate failure--Some evidence for the UK corporate sector," Omega, Elsevier, vol. 16(4), pages 309-318.
    3. Setia-Atmaja, Lukas & Haman, Janto & Tanewski, George, 2011. "The role of board independence in mitigating agency problem II in Australian family firms," The British Accounting Review, Elsevier, vol. 43(3), pages 230-246.
    4. K. Peasnell & P. Pope & S. Young, 2001. "The characteristics of firms subject to adverse rulings by the Financial Reporting Review Panel," Accounting and Business Research, Taylor & Francis Journals, vol. 31(4), pages 291-311.
    5. Hwang, Byoung-Hyoun & Kim, Seoyoung, 2009. "It pays to have friends," Journal of Financial Economics, Elsevier, vol. 93(1), pages 138-158, July.
    6. Evi Neophytou & Cecilio Mar Molinero, 2004. "Predicting Corporate Failure in the UK: A Multidimensional Scaling Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5‐6), pages 677-710, June.
    7. Charitou, Andreas & Louca, Christodoulos & Vafeas, Nikos, 2007. "Boards, ownership structure, and involuntary delisting from the New York Stock Exchange," Journal of Accounting and Public Policy, Elsevier, vol. 26(2), pages 249-262.
    8. Milton Harris & Artur Raviv, 2008. "A Theory of Board Control and Size," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1797-1832, July.
    9. Gales, Lawrence M. & Kesner, Idalene F., 1994. "An analysis of board of director size and composition in bankrupt organizations," Journal of Business Research, Elsevier, vol. 30(3), pages 271-282, July.
    10. Shivdasani, Anil, 1993. "Board composition, ownership structure, and hostile takeovers," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 167-198, April.
    11. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. Blum, M, 1974. "Failing Company Discriminant-Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 12(1), pages 1-25.
    14. Keasey, K & McGuinness, P & Short, H, 1990. "Multilogit approach to predicting corporate failure--Further analysis and the issue of signal consistency," Omega, Elsevier, vol. 18(1), pages 85-94.
    15. repec:bla:jfinan:v:58:y:2003:i:2:p:519-548 is not listed on IDEAS
    16. Linck, James S. & Netter, Jeffry M. & Yang, Tina, 2008. "The determinants of board structure," Journal of Financial Economics, Elsevier, vol. 87(2), pages 308-328, February.
    17. Igor Filatotchev & Steve Toms & Mike Wright, 2006. "The firm's strategic dynamics and corporate governance life-cycle," International Journal of Managerial Finance, Emerald Group Publishing, vol. 2(4), pages 256-279, September.
    18. Beaver, Wh, 1966. "Financial Ratios As Predictors Of Failure," Journal of Accounting Research, Wiley Blackwell, vol. 4, pages 71-111.
    19. Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, vol. 62(1), pages 217-250, February.
    20. Shelly W. Howton, 2006. "Effect of Governance Characteristics on the State of the Firm after an Initial Public Offering," The Financial Review, Eastern Finance Association, vol. 41(3), pages 419-433, August.
    21. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    22. Baysinger, Barry D & Butler, Henry N, 1985. "Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 1(1), pages 101-124, Spring.
    23. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    24. Byrd, John W. & Hickman, Kent A., 1992. "Do outside directors monitor managers? *1: Evidence from tender offer bids," Journal of Financial Economics, Elsevier, vol. 32(2), pages 195-221, October.
    25. Evi Neophytou & Cecilio Mar Molinero, 2004. "Predicting Corporate Failure in the UK: A Multidimensional Scaling Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5-6), pages 677-710.
    26. Chahine, Salim & Filatotchev, Igor, 2011. "The effects of corporate governance and audit and non-audit fees on IPO Value," The British Accounting Review, Elsevier, vol. 43(3), pages 155-172.
    27. Raheja, Charu G., 2005. "Determinants of Board Size and Composition: A Theory of Corporate Boards," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(2), pages 283-306, June.
    28. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    29. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, vol. 9(Apr), pages 7-26.
    30. Zeki Simsek, 2007. "CEO tenure and organizational performance: an intervening model," Strategic Management Journal, Wiley Blackwell, vol. 28(6), pages 653-662, June.
    31. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    32. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2008. "Boards: Does one size fit all," Journal of Financial Economics, Elsevier, vol. 87(2), pages 329-356, February.
    33. Faleye, Olubunmi & Hoitash, Rani & Hoitash, Udi, 2011. "The costs of intense board monitoring," Journal of Financial Economics, Elsevier, vol. 101(1), pages 160-181, July.
    34. Rajeswararao S. Chaganti & Vijay Mahajan & Subhash Sharma, 1985. "Corporate Board Size, Composition And Corporate Failures In Retailing Industry[1]," Journal of Management Studies, Wiley Blackwell, vol. 22(4), pages 400-417, July.
    35. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    36. Andres Almazan & Javier Suarez, 2003. "Entrenchment and Severance Pay in Optimal Governance Structures," Journal of Finance, American Finance Association, vol. 58(2), pages 519-547, April.
    37. Beaver, Wh, 1966. "Financial Ratios As Predictors Of Failure - Reply," Journal of Accounting Research, Wiley Blackwell, vol. 4, pages 123-127.
    38. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    39. Catherine M. Daily & Dan R. Dalton, 1994. "Corporate governance and the bankrupt firm: An empirical assessment," Strategic Management Journal, Wiley Blackwell, vol. 15(8), pages 643-654, October.
    40. Mangena, Musa & Chamisa, Eddie, 2008. "Corporate governance and incidences of listing suspension by the JSE Securities Exchange of South Africa: An empirical analysis," The International Journal of Accounting, Elsevier, vol. 43(1), pages 28-44, March.
    41. Donald C. Hambrick & Richard A. D'Aveni, 1992. "Top Team Deterioration as Part of the Downward Spiral of Large Corporate Bankruptcies," Management Science, INFORMS, vol. 38(10), pages 1445-1466, October.
    42. Mak, Y. T. & Li, Yuan, 2001. "Determinants of corporate ownership and board structure: evidence from Singapore," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 235-256, September.
    43. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 377-397, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Isaih Dzingai & Michael Bamidele Fakoya, 2017. "Effect of Corporate Governance Structure on the Financial Performance of Johannesburg Stock Exchange (JSE)-Listed Mining Firms," Sustainability, MDPI, vol. 9(6), pages 1-15, June.
    2. Shan, Yuan George, 2019. "Do corporate governance and disclosure tone drive voluntary disclosure of related-party transactions in China?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 34(C), pages 30-48.
    3. Adeel Mustafa & Abubakr Saeed & Muhammad Awais & Shahab Aziz, 2020. "Board-Gender Diversity, Family Ownership, and Dividend Announcement: Evidence from Asian Emerging Economies," JRFM, MDPI, vol. 13(4), pages 1-20, March.
    4. Emad Noureldeen & Mohamed Elsayed & Ahmed A. Elamer & Jianming Ye, 2024. "Two-tier board characteristics and expanded audit reporting: Evidence from China," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 195-235, July.
    5. Wu, Chloe Yu-Hsuan & Hsu, Hwa-Hsien, 2018. "Founders and board structure: Evidence from UK IPO firms," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 19-31.
    6. María Consuelo Pucheta‐Martínez & Inmaculada Bel‐Oms, 2019. "What have we learnt about board gender diversity as a business strategy? The appointment of board subcommittees," Business Strategy and the Environment, Wiley Blackwell, vol. 28(2), pages 301-315, February.
    7. Rebeiz, Karim S., 2018. "Relationship between boardroom independence and corporate performance: Reflections and perspectives," European Management Journal, Elsevier, vol. 36(1), pages 83-90.
    8. Ahsan Habib & Mabel D' Costa & Hedy Jiaying Huang & Md. Borhan Uddin Bhuiyan & Li Sun, 2020. "Determinants and consequences of financial distress: review of the empirical literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 1023-1075, April.
    9. Phillip C. James, 2020. "Understanding the Impact of Board Structure on Firm Performance: AComprehensive Literature Review," International Journal of Business and Social Research, LAR Center Press, vol. 10(1), pages 1-12, January.
    10. Kamil K. Nazliben & Luc Renneboog & Emil Uduwalage, 2024. "Corporate governance from colonial Ceylon to post-civil war Sri Lanka," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 28(1), pages 265-335, March.
    11. Giuseppe D’Onza & Alessandra Rigolini, 2017. "Does director capital influence board turnover after an incident of fraud? Evidence from Italian listed companies," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(4), pages 993-1022, December.
    12. Elsayed, Mohamed & Elshandidy, Tamer & Ahmed, Yousry, 2022. "Corporate failure in the UK: An examination of corporate governance reforms," International Review of Financial Analysis, Elsevier, vol. 82(C).
    13. Stef, Nicolae & Bissieux, Jean-Joachim, 2022. "Resolution of corporate insolvency during COVID-19 pandemic. Evidence from France," International Review of Law and Economics, Elsevier, vol. 70(C).
    14. Li, Zhiyong & Crook, Jonathan & Andreeva, Galina & Tang, Ying, 2021. "Predicting the risk of financial distress using corporate governance measures," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    15. Yuan George Shan & Indrit Troshani & Jimin Wang & Lu Zhang, 2023. "Managerial ownership and financial distress: evidence from the Chinese stock market," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 20(1), pages 192-221, May.
    16. Marwa Elnahass & Kamil Omoteso & Aly Salama & Vu Quang Trinh, 2020. "Differential market valuations of board busyness across alternative banking models," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 201-238, July.
    17. Phillip C. James, 2020. "Understanding the Impact of Board Structure on Firm Performance: AComprehensive Literature Review," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 10(1), pages 1-12, January.
    18. Hussain, Shahzad & Akbar, Muhammad & Malik, Qaisar & Ahmad, Tanveer & Abbas, Nasir, 2021. "Downside Systematic Risk in Pakistani Stock Market: Role of Corporate Governance, Financial Liberalization and Investor Sentiment," CAFE Working Papers 14, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.
    19. Polovina, Nereida & Peasnell, Ken, 2020. "Do minority acquisitions transfer better corporate governance practices? An analysis of UK's cross-border minority investments," The British Accounting Review, Elsevier, vol. 52(3).
    20. María Consuelo Pucheta-Martínez & Isabel Gallego-Álvarez, 2020. "Do board characteristics drive firm performance? An international perspective," Review of Managerial Science, Springer, vol. 14(6), pages 1251-1297, December.
    21. Akbar, Muhammad & Hussain, Shahzad & Ahmad, Tanveer & Hassan, Shoib, 2020. "Corporate Governance and Firm Performance in Pakistan: Dynamic Panel Estimation," CAFE Working Papers 6, Centre for Accountancy, Finance and Economics (CAFE), Birmingham City Business School, Birmingham City University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Phillip C. James, 2020. "Understanding the Impact of Board Structure on Firm Performance: AComprehensive Literature Review," International Journal of Business and Social Research, LAR Center Press, vol. 10(1), pages 1-12, January.
    2. Phillip C. James, 2020. "Understanding the Impact of Board Structure on Firm Performance: AComprehensive Literature Review," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 10(1), pages 1-12, January.
    3. Bill B. Francis & Iftekhar Hasan & Qiang Wu, 2012. "Do corporate boards matter during the current financial crisis?," Review of Financial Economics, John Wiley & Sons, vol. 21(2), pages 39-52, April.
    4. Volonté, Christophe, 2015. "Boards: Independent and committed directors?," International Review of Law and Economics, Elsevier, vol. 41(C), pages 25-37.
    5. Aman, Hiroyuki & Nguyen, Pascal, 2013. "Does good governance matter to debtholders? Evidence from the credit ratings of Japanese firms," Research in International Business and Finance, Elsevier, vol. 29(C), pages 14-34.
    6. Naeem Tabassum & Satwinder Singh, 2020. "Corporate Governance and Organisational Performance," Springer Books, Springer, number 978-3-030-48527-6, December.
    7. Chaur-Shiuh Young & Liu-Ching Tsai & Pei-Gin Hsieh, 2008. "Voluntary Appointment of Independent Directors in Taiwan: Motives and Consequences," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(9-10), pages 1103-1137.
    8. Aziz Jaafar & Lynn Hodgkinson & Mao-Feng Kao, 2019. "Ownership Structure, Board of Directors and Firm Performance: Evidence from Taiwan," Working Papers 19011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    9. Chi, Jianxin Daniel & Scott Lee, D., 2010. "The conditional nature of the value of corporate governance," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 350-361, February.
    10. Shkendije Himaj, 2014. "Corporate Governance in Banks and its Impact on Risk and Performance: Review of Literature on the Selected Governance Mechanisms," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 3(3), pages 53-85.
    11. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    12. Wintoki, M. Babajide & Xi, Yaoyi, 2019. "Friendly directors and the cost of regulatory compliance," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 112-141.
    13. Bill Francis & Iftekhar Hasan & Qiang Wu, 2015. "Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance," Financial Management, Financial Management Association International, vol. 44(3), pages 547-581, September.
    14. Sumaira Ashraf & Elisabete G. S. Félix & Zélia Serrasqueiro, 2022. "Does board committee independence affect financial distress likelihood? A comparison of China with the UK," Asia Pacific Journal of Management, Springer, vol. 39(2), pages 723-761, June.
    15. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
    16. Crespí-Cladera, Rafel & Pascual-Fuster, Bartolomé, 2014. "Does the independence of independent directors matter?," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 116-134.
    17. Booth, James R. & Cornett, Marcia Millon & Tehranian, Hassan, 2002. "Boards of directors, ownership, and regulation," Journal of Banking & Finance, Elsevier, vol. 26(10), pages 1973-1996, October.
    18. Afzalur Rashid, 2015. "Revisiting Agency Theory: Evidence of Board Independence and Agency Cost from Bangladesh," Journal of Business Ethics, Springer, vol. 130(1), pages 181-198, August.
    19. Etienne Redor, 2016. "Board attributes and shareholder wealth in mergers and acquisitions: a survey of the literature," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(4), pages 789-821, December.
    20. Dahya, Jay & Golubov, Andrey & Petmezas, Dimitris & Travlos, Nickolaos G., 2019. "Governance mandates, outside directors, and acquirer performance," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 218-238.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:bracre:v:46:y:2014:i:3:p:215-227. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/the-british-accounting-review .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.