Board diversity and bankruptcy: Evidence from Finnish small and medium-sized enterprises

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Journal Title

Journal ISSN

Volume Title

School of Business | Master's thesis

Authors

Date

2022

Department

Laskentatoimen laitos

Major/Subject

Mcode

Degree programme

Accounting

Language

en

Pages

59+9

Series

Abstract

The task of this thesis is to investigate the relationship between board diversity and bankruptcy with empirical evidence from Finnish SMEs. The thesis reviews the academic literature related to board characteristics diversity and its impact on firm performance, including bankruptcy, exploring theoretical rationales and empirical results. In theoretical rationale, agency theory, signal theory and resource dependence theory support that firms with board of directors with more diverse characteristics have better firm performance or firm value, while social identity theory, similarity–attraction theory, and social categorization theory are against it. In prior empirical research studies, there is no consistent results on this relationship. Based on the prior research and results, the paper claims that non-bankrupt firms have a higher level of board diversity than bankrupt firms, proposing 7 hypotheses that gender diversity, age diversity, tenure diversity, separation of CEO and Chair, outside CEO in the board, the overall diversity and board size, are negatively related to bankruptcy risk. The paper selects 50 bankrupt firms which operated and registered in Finish Patent and Registration Office between 1st January 2005 and 30th November 2015 and matches each bankrupt firm with one non-bankrupt company according to the industry field and company’s size. The board information and financial information of 50 matched pairs are in 5 consecutive financial years from T-6 to T-2, if T year is counted as the final closure year in Finish Patent and Registration Office. Both bankrupt firms and non-bankrupt firms are small and medium-sized enterprises. The thesis adopts Blau index to measure the diversity level of each board attribute. Then the author employs methods of comparison of means, logit regression model and cox hazard to analysis the sample data. The final empirical results support that non-bankruptcy company have higher the overall board diversity level than bankruptcy companies. The overall board diversity refers to sum of gender diversity, age diversity, tenure diversity, separation of CEO and Chair, and outside CEO on the board. What’s more, the overall board diversity shows early signs of bankruptcy than profitability. Additionally, the results partially support that insolvent companies are more likely to have boards with low gender diversity and duality of CEO and chair than healthy companies. Nevertheless, age diversity, tenure diversity, outside CEO on board and board size don’t significantly correlate with bankruptcy.

Description

Thesis advisor

Ikäheimo, Seppo

Keywords

board diversity, bankruptcy, SME, Finnish SMEs

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Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-202205153169

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[gradu] Kauppakorkeakoulu / BIZ