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      Corporate governance and correlation in corporate defaults

      Fernando, Jayasuriya Mahapatabendige Ruwani; Li, Leon; Hou, Yang (Greg)
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      corg.12306.pdf
      Accepted version, 1.791Mb
      DOI
       10.1111/corg.12306
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      Citation
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      Fernando, J. M. R., Li, L., & Hou, Y. (Greg). (2019). Corporate governance and correlation in corporate defaults. Corporate Governance: An International Review. https://doi.org/10.1111/corg.12306
      Permanent Research Commons link: https://hdl.handle.net/10289/13188
      Abstract
      Manuscript Type

      Empirical

      Research Question/Issue

      This study examines the effect of weak corporate governance in terms of concentrated ownership, low board effectiveness, low financial transparency and higher shareholder rights on default correlation when firms have different credit qualities.

      Research Findings/Insights

      Using historical default data in the United States from 2000 to 2015, we find that the degree of default correlation increases disproportionately for firms with concentrated ownership, low board effectiveness, low financial transparency and disclosures, and higher shareholder rights. More importantly, the effect of weak corporate governance on default correlation is high during a financial crisis.

      Theoretical/Academic Implications

      This is one of the first studies testing the impact of corporate governance on the correlation in corporate defaults. It indicates new avenues of research for both corporate governance and credit risk management in relation to why joint default probabilities vary among firms.

      Practitioner/Policy Implications

      Our results imply that good corporate governance is essential for credit risk management because poor corporate governance may increase individual default risk and create the domino effect of credit defaults. Practitioners and policy makers should enhance control over poor governance practices to reduce the probabilities of default. Moreover, the impact of corporate governance on correlation in corporate defaults is more pronounced in financial crises and warrants consideration from policy makers to take steps toward cushioning its effects.
      Date
      2019
      Type
      Journal Article
      Publisher
      Wiley
      Rights
      This is an author’s accepted version of an article published in the journal: Corporate Governance: An International Review. © 2019 Wiley.
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      • Management Papers [1136]
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