Board structure and financial distress in Brazilian firms

The purpose of this paper is to investigate what board characteristics affect companies in periods of financial distress (FD) among non-financial Brazilian firms and examine which model best fits to predict FD.

The sample comprises data from 2010 to 2016 of the non-financial Brazilian firms listed on the Brazilian Stock Exchange. To measure this relationship, a conditional logistic regression is performed.

A U-shaped relationship between the size of the board of directors (BD) and FD is found in all models, indicating an optimal number of six members in the BD during the period of FD. However, board characteristics (related to composition and directors’ independence) are insufficient to align the shareholders’ interests and unsuitable for avoiding or even reducing FD in firms when other factors are neglected. Furthermore, the results reveal what variables provide the best-fitting models to predict FD.

To the best of the authors’ knowledge, this is the first study that investigates how the composition of the BD affects the FD likelihood in the Brazilian context. The findings are potentially of interest to researchers and practitioners since this paper contributes to the growing literature on the influence of corporate governance mechanisms in periods of FD and the understanding of its prediction models.