Corporate Governance and Corporate Failure Likelihood in Nigeria: A Heckman Model Approach

Abstract

The study examined corporate governance and the likelihood of corporate failure with particular focus on non-financial companies in Nigeria. The objectives were to determine the likely effect that board size, board independence and board gender diversity will have on financial failure of corporate organisations. The Altman Z score model was used as indicator for failure likelihood and the research design used was the ex-post facto research design. The study adopted a positivism research philosophy and examined 75 non-financial companies listed on the Nigerian Exchange Group. The study adopted the binary regression technique for the initial estimation and then for robustness, this study uses the Heckman selection model for sample selection, which simultaneously tackles discrete/continuous modeling issues, unobserved heterogeneity, selectivity bias, and endogeneity issues. From the results, at 5% level of significance, board size shows a positive effect on failure likelihood. Secondly, an increase in board independence will result into a decrease in corporate failure since board independence is negative in both the response and selection equations. Thirdly, despite being insignificant at 5%, Board gender diversity is negative in both the response and selection equations, which implies that increasing the level of board gender diversity will result in reducing the likelihood of corporate failure. However, caution is exercised in drawing inferences due to the non-statistical significance of the variable. The study recommends that listed firms may need to cut down their board sizes. Secondly, the study recommends that corporate boards should increase their board independence levels. Thirdly, the study recommends that boards need to look at their board gender diversity levels.