Does Board Structure Affect Financial Distress? A Study with Reference to Family Firms in Lebanon

This study offers to regulators and pr actitioners evidence on the role of the board of directors' composition in the financial distress of family businesses in an emerging economy such as Lebanon. The paper examines the role of outside directors, insiders' equity ownership, and CEO-board chair duality on the financial distress of non-listed family-owned firms. Between the periods of 2007-2010, the authors investigate 276 firms that were equally divided between a control and an experimental group, using a multiple logistic regression between a proxy ratio of financial distress and three exogenous variables of corporate governance. Empirical results based on a longitudinal sample indicate that (1) the presence of outside directors on the board of directors has no effect on financial distress; and (2) insiders' equity ownership reduces the likelihood of financial distress; whereas, (3) the CEO-board chair duality increases the probability of financial distress of Le banese family businesses. The findings may well urge Lebanese invest ors and regulators towards a selective implementation of governance practices, to enha nce the performance of one of the pillar of the Lebanese economy. The replacement of an inside director by an outsider will not increase the chance of survival of familyowned firms. In contrast, equity ownership held by insiders and the separ ation of the CEO-Chairperson position can be used as a tool to reduce agency costs, and as a result, enhance the financial performance.