Corporate governance and the probability of default

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Journal Article
Accounting and Finance, 2017, 57 pp. 235 - 253
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© 2015 AFAANZ We employ Merton's probability of default as a continuous ex-ante measure of the likelihood of firm failure and dynamic panel generalised method of moments to better characterise the relationship between corporate governance and the chance of default. In doing so, we overcome limitations of discrete proxies widely used in previous studies and more completely account for endogeneity issues permeating this area of research. While initial testing designed to facilitate comparison with previous studies suggests a significant relationship between the probability of default and executive pay, board structure and ownership structure, once endogeneity concerns are accounted for, no such relationship remains.
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