Corporate governance and prediction of financial failure of companies listed on the stock exchange of Thailand

Abstract

The aim of this study was to investigate the influence of corporate governance (CG) and financial ratios and to evaluate the reliability of these factors in relation to the prediction of the financial failure of companies listed on the Stock Exchange of Thailand (SET). Data sets included non-financial firms in the Years 2006, 2007 and 2008 to make three-year, two-year and one-year forecasting prior to financial failure in 2009. The study was conducted by the logistic regression analysis method. Fifteen variables were selected to develop the models. Three models were mainly developed and investigated: Model 1 included corporate governance variables, while Model 2 included financial ratio variables. Moreover, Model 3 included both corporate governance variables and financial ratios. All models were tested to determine whether corporate governance and financial ratios were related to the probability of financial failure and whether they could be significant indicators for evaluating the ability to predict the financial failure of firms listed on SET. It was found that CG variables, representing auditor’s opinion and board size and financial ratios, retained earnings to total assets, return on assets and capital structure did influence financial failure at the significant level of .001. In Model 3, which included CG and financial ratios, financial failure was correctly predicted at 99.70%. These findings should contribute to the field of management by increasing the understanding of potential financial failure, and could be used by decision makers in their evaluation of business performance.