Corporate governance and financial distress: An endogenous switching regression model approach in vietnam

Figures & data

Table A1. Variables description

Variables	Variable names	Measurement
Dependent Variable
Y	Financial distress (FD)	Altman Z-score is the proxy of the financial distress Altman Z-score = 1.2*(Working capital/ Total assets)+1.4*(Retained earnings/Total assets)+3.3*(Earnings before interest and tax/Total assets)+0.6*(Market value of equity/Total liabilities)+1*(Total sales/ Total assets). 0–1.8 is the distress zone 1.8–3 is the grey zone 3–4 is the safe zone
Independent Variable
ROA	ROA	The ratio of the net income on the book value of total assets.
LEV	LEV	The ratio of the book value of the total debt to the book value of the total assets.
Firm size	Firm size	Logarithmic of market value.
CR	Current ratio	The ratio of current assets to current liabilities
GM	Gross profit margin	The ratio of the gross profit to the total revenue
GDP Growth rate	GDP Growth rate	GDP Growth rate (collected from the Vietnamese Statistic Department)
INFR	Inflation rate	Inflation rate (collected from Vietnamese Statistic Department)
IR	Interest rate	Borrowing interest rate (collected from Vietnamese Statistic Department)
UE	Unemployment rate	Unemployment rate (collected from Vietnamese Statistic Department)
SI	Stock Index	VNI Stock Index (collected in HOSE)
Corporate Governance
ID	Independent Director	% of independent and outside directors.
SE	Separation of CEO and Chairman	1 if there is the separation of CEO and Chairman, otherwise, 0.
DO	Director Ownership	The percentage of the shares held by the directors.
BS	Board size	The number of the board members.
AC	Auditing Committee	% of independent members.
FM	Frequent Meeting	The number of annual meetings of the board of directors.
EX	Expertise	The educational background, managerial years and the working experience years of the directors.
RC	Remuneration Committee	% of independent members.
NC	Nomination Committee	% of independent members.

The table describes the variables in the model with the dependent variable, independent variables and corporate governance variables of the 240 listed Vietnamese firms in HOSE from 2010 to 2019 following the research of (Cadbury, 2000; Clarke, 2004; Wymeersch, 2006; Rodriguez-Dominguez et al., 2009; Peni & Vähämaa, 2012; Van Essen et al., 2013; Miglani et al., 2015; Van Essen et al., 2013; Li et al. 2021; Younas et al., 2021)

Table A2. Conditional expectations, treatment and heterogeneous effect

Altman Z-score	Adoption status	Prediction		Treatment effect
		SCG	WCG
Altman Z-score	Firm with SCG	(5) $E\left(y_{1i}|S_i=1\right)$	(6) $E\left(y_{0i}|S_i=1\right)$	TT
	Firm with WCG	(7) $E\left(y_{1i}|S_i=0\right)$	(8) $E\left(y_{0i}|S_i=0\right)$	TU
	Heterogeneity effect	BH1	BH0	TH

(a) TT = (5)-(6)

(b) TU = (7)-(8)

(c) BH_i: the effect of the base heterogeneity for firms with strong corporate governance and weak corporate governance.

(d) TH = TT-TU is the transitional heterogeneity.

Table A3. Descriptive statistic of the variables: mean, standard deviation, SCG and WCG

	Sample		Strong Corporate Governance (SCG)		Weak Corporate Governance (WCG)		Difference
	Mean	Standard Deviation	Mean	Standard Deviation	Mean	Standard Deviation	Difference in Mean
ROA	0.09125	0.0928	0.0988	0.1109	0.087	0.07963	0.0118***
LEV	1.2143	0.9708	1.1509	1.1072	1.252	0.87737	−0.1011***
Firmsize	28.7704	1.3287	29.0685	1.5374	28.59	1.1507	0.4785***
CR	0.076	1.4593	0.1265	1.5469	0.041	1.4019	0.0855***
GM	0.1824	0.1645	0.1985	0.1777	0.173	0.1554	0.0255***
Altman Z-score	3.664	1.8034	7.2872	1.0348	3.182	2.737	4.1052***
GDP growth	0.0631	0.005943	0.0631	0.005943	0.063	0.005943	0.0000
Inflation rate	0.06091	0.04971	0.06091	0.04971	0.06091	0.04971	0.0000
Interest rate	0.0988	0.03324	0.0988	0.03324	0.0988	0.03324	0.0000
Unemployment rate	0.01448	0.00384	0.01448	0.00384	0.01448	0.00384	0.0000
Stock Index	636.131	204.058	636.131	204.058	636.131	204.058	0.0000

***p-value < 0.01, ** p-value < 0.05, * p-value <0.1

The table describes the statistic of the variables in the model. ROA is a return on assets. LEV is leverage. Firmsize is the firm size. CR is the current ratio. GM is the gross profit margin. GDP growth rate is the growth rate of GDP. INFR is the inflation rate. IR is the interest rate. UE is the unemployment rate. SI is the stock index.

Table A4. Test for the mean difference of corporate governance dimensions in strong and weak practice

	Strong Corporate Governance (SCG)		Weak Corporate Governance (WCG)		Difference
	Mean	Standard Deviation	Mean	Standard Deviation	Difference in Mean
ID	0.8546	0.0323	0.564	0.7963	0.2906***
SE	0.965	0.0212	0.324	0.87737	0.641***
DO	0.645	0.5374	0.234	1.1507	0.411***
BS	7.516	1.576	7.652	1.762	−0.136
AC	0.852	0.1242	0.425	0.324	0.427***
FM	2.653	1.534	2.534	1.652	0.119
EX	15.035	1.635	6.8262	1.735	8.2088***
RC	0.735	0.635	0.439	0.5343	0.296***
NC	0.801	0.0132	0.3514	0.0352	0.4496***

***p value < 0.01, ** p value < 0.05, * p value <0.1

The table tests for the mean difference of corporate governance dimensions in strong and weak practice. ID is an independent director. SE is the separation of CEO and Chairman. DO is the director’s ownership. BS is board size. AC is the independence of the auditing committee. FM is frequent meetings. EX is the expertise of the director. RC is the independence of the remuneration committee. NC is the independence of the nomination of the committee.

Table A5. The results of the macro and micro factors affect two patterns applying the endogenous switching regression model (ESRM)

Balance panel (N = 2400)
Log likelihood = −3763.8357
Variable
Weak Corporate Governance (WCG)		Threshold function
Constant	4.9951***	ID	1.1327***
ROA	10.36031***	SE	0.8842***
LEV	−0.4492***	DO	0.08197***
Firmsize	−0.16807***	BS	0.1491
CR	0.580156***	AC	1.0826***
GM	0.53096***	FM	−0.07934
GDP growth rate	1.14063***	EX	0.08688***
Inflation rate	−0.24974	RC	0.3045***
Interest rate	0.105442	NC	2.062***
Unemployment rate	1.487698
Stock Index	−0.04004	Constant	−4.0508***
		$Wald\hspace{0.17em}{X}^2$	1423***
${\sigma }_1$	17.983***
Strong Corporate Governance (SCG)
Constant	5.60468***
ROA	13.1339***
LEV	−0.1632***
Firmsize	−0.14975***
CR	1.8178***
GM	0.87012***
GDP growth rate	2.68476***
Inflation rate	−0.25674
Interest rate	0.17276
Unemployment rate	1.49654
Stock Index	−0.04013
${\sigma }_2$	0.5436***

***p value < 0.01, ** p value < 0.05, * p value <0.1

The table describes the result of the ESRM model. ROA is a return on assets. LEV is leverage. Firmsize is the firm size. CR is the current ratio. GM is the gross profit margin. GDP growth rate is the growth rate of GDP. INFR is the inflation rate. IR is the interest rate. UE is the unemployment rate. SI is the stock index. ID is an independent director. SE is the separation of CEO and Chairman. DO is the director’s ownership. BS is board size. AC is the independence of the auditing committee. FM is frequent meetings. EX is the expertise of the director. RC is the independence of the remuneration committee. NC is the independence of the nomination of the committee.

Table A6. Impact of CG on the financial distress with ESRM

Altman Z-score	Adoption status	Prediction		Treatment effect
		SCG	WCG
Altman Z-score	Firm with SCG	7.763	3.635	4.128***
	Firm with WCG	7.463	3.064	4.399***
	Heterogeneity effect	0.300	0.571	−0.271***

***p value < 0.01, ** p value < 0.05, * p value <0.1

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