Board Capital and the Downward Spiral: Antecedents of Bankruptcy in a Sample of Unlisted Firms

TLDR: The authors examined whether certain proxies for board incentives and board capital are linked with bankruptcy in unlisted firms and found that firms with boards led by an independent board chair (vs. CEO duality), and including longer-tenured directors, and directors with fewer additional directorships on average, are less likely to become bankrupt.

Abstract: Manuscript Type Empirical Research Question/Issue This study examines whether certain proxies for board incentives and board capital are linked with bankruptcy in unlisted firms. Research Findings/Insights Based on data analyzed over a five-year period with a sample of 232 matched pairs of unlisted firms, results reveal that firms with boards led by an independent Board Chair (vs. CEO duality), and including longer-tenured directors, and directors with fewer additional directorships on average, are less likely to become bankrupt. Results of analyses of board size and board change support a �reputation� hypothesis, i.e. that directors begin to flee firms in a downward spiral prior to bankruptcy. Theoretical/Academic Implications Results support an eclectic model of board incentives and board capital, which integrates elements of agency and resource dependence theories, and the group decision-making literature to explain governance antecedents of firms that went bankrupt. It builds on a model proposed by Hillman and Dalziel, while identifying important differences, including lack of support for predicted moderating effects between board incentives and board capital. Findings also support applicability of the threat-rigidity logic and reputation hypothesis in this context, and the importance of anchoring corporate governance research more precisely on prediction of certain levels of performance. Practitioner/Policy Implications Findings support governance recommendations to separate Board Chair and CEO leadership and limit a director's number of outside directorships. Negative effects of director tenure on bankruptcy contradict the notion of �term limits,� suggesting that benefits of firm-specific knowledge and experience may outweigh risks of entrenchment.