Analyzing the Governance Role of the Board of Directors and Turnaround Firms: Evidence from the Iranian Capital Market

Subject Areas : Financial Knowledge of Securities Analysis

Mohsen Imeni ¹ , Seyed Reza Seyed Nejad Fahim ² , Fatemeh Gholami Golsefid ³

1 - Associate Prof., Department of Accounting, Ayandegan Institute of Higher Education, Tonekaboon, Iran. (Corresponding Author)
2 - Assistant Prof., Department of Accounting, Lahijan Branch, Islamic Azad University, Lahijan, Iran.
3 - Assistant Prof., Department of Mathematics, Lahijan Branch, Islamic Azad University, Lahijan, Iran

Received: 2024-03-17 Accepted : 2024-10-20 Published : 2025-12-06

Keywords: Turnaround Firms, Corporate Governance, Financial Crisis, Firm Size.,

Abstract :

The purpose of this research is to investigate the effect of the characteristics of the board of directors on turnaround companies involved in the financial crisis. To achieve this purpose, four indicators of board independence, the number of board meetings, CEO duality and directors' financial knowledge were used. To achieve the aims of the research, a sample of 125 companies listed to the Tehran Stock Exchange was selected during the period of 2015 to 2021, and the proposed hypotheses were tested using logistic regression model in EViews software. The results of the test showed that there is no significant relationship between the independence of the board of directors and dual duties of the CEO with the turnaround of the company, but the results indicate that there is a positive and significant relationship between the number of meetings of the board of directors and also financial knowledge with the turnaround of companies. Also, the results indicate that as the index of the board of directors increases, the recovery of companies involved in the financial crisis will also improve. The results indicate that the index of the board of directors will be more important in smaller companies than in larger companies. The results show that firm performance during the financial crisis is a function of board level differences. This research provides evidence about the relationship between corporate governance and corporate turnaround. This topic can be useful for shareholders, managers and regulatory authorities in decision making, evaluations and policies.

References:

1. Acosta-González, E., Fernández-Rodríguez, F., & Ganga, H. (2019). Predicting corporate financial failure using
macroeconomic variables and accounting data. Computational Economics, 53(1), 227-257.‏ 2. Abubakar, A. H., Ado, A. B., Mohamed, M. I., & Mustapha, U. A. (2018). The effect of risk management committee attributes and board financial knowledge on the financial performance of listed banks in Nigeria. American International Journal of Business Management, 1(5), 7-13.‏ Retrieved from: https://www.researchgate.net/profile/Umar-Mustapha/publication/337446013 3. Agrawal, A., & Chadha, S. (2005). Corporate governance and accounting scandals. The Journal of Law and Economics, 48(2), 371-406.‏ Retrieved from:https://www.journals.uchicago.edu/doi/abs/10.1086/430808 4. Ahn, Y. (2019). Distress cost and corporate financing policy: evidence from the equity options market. Applied Economics, 51(39), 4299-4312. Retrieved from:doi.org/10.1080/00036846.2019.1591602 5. Algaragolle, W. M. H. (2022). Revival of the Stumbled Companies in Iraqi and Egyptian Law (A Comparative Study). Journal of Positive School Psychology, 6(2s), 24-38.‏ Retrieved from: http://mail.journalppw.com/index.php/jpsp/article/view/8625 6. Arogyaswamy, K., Barker, V. L., & Yasai-Ardekani, M. (1995). Firm turnarounds: An integrative two-stage model. Journal of Management Studies, 32(4), 493-525. Retrieved from:https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-6486.1995.tb00786.x 7. Beasley, M. S. (1996). An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud, The Accounting Review, 71(4), 443-465. Retrieved from: https://www.jstor.org/stable/248566 8. Chang, J. C., & Sun, H. L. (2008). The relation between earning in formativeness, earnings management and corporate governance in the pre-and post-SOX periods. In 2008 AAA Mid-Atlantic Region Meeting, 24-26. Retrieved from: http://ssrn.com/abstract=1299221 9. Deilmi, S., & Safari Graili, M. (2015). Examining the relationship between the quality of corporate governance and the volatility of stock returns. Experimental Accounting Research, 6(21), 115-136. [In Persian] 10. Dionne, G., & Triki, T. (2005). Risk management and corporate governance: The importance of independence and financial knowledge for the board and the audit committee. Retrieved from: http://dx.doi.org/10.2139/ssrn.686470 ‏ 11. Erickson, J., Park,Y. W., Reising, J., & Shin, H. H. (2005). Board composition and firm value under concentrated ownership: The Canadian evidence. Pacific-Basin Finance Journal, 13, 387-410. Retrieved from: doi.org/10.1016/j.pacfin.2004.11.002 12. Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of corporate finance, 18(2), 389-411. Retrieved from: doi.org/10.1016/j.jcorpfin.2012.01.005 13. Esmailikia, Gh., & Oshni, M. (2022). Corporate financial sustainability and fraudulent financial reporting: The role of quality and corporate governance mechanisms. Journal of Accounting Knowledge, 13(2), 83-104. [In Persian] 14. Evans, J., Evans, R., & Loh, S. (2002). Corporate governance and declining firm performance. International Journal of Business Studies, 10(1).‏ 1-18. Retrieved from: doi.org/10.1211/j.1567-8682.2011.00862 15. Fernandes, C., Farinha, J., Martins, F. V., & Mateus, C. (2021). The impact of board characteristics and CEO power on banks’ risk-taking: stable versus crisis periods. Journal of Banking Regulation, 22, 319-341. Retrieved from: doi.org/10.1057/s41261-021-00146-4 16. Fich, E. M., & Slezak, S. L. (2008). Can corporate governance save distressed firms from bankruptcy? An empirical analysis. Review of Quantitative Finance and Accounting, 30, 225-251.‏ Retrieved from: doi.org/10.1007/s11156-007-0048-5 17. Francis, B. B., Hasan, I., & Wu, Q. (2012). Do corporate boards matter during the current financial crisis?. Review of Financial Economics, 21(2), 39-52. Retrieved from: doi.org/10.1016/j.rfe.2012.03.001 18. Grove, H., Patelli, L., Victoravich, L. M., & Xu, P. (2011). Corporate governance and performance in the wake of the financial crisis: Evidence from US commercial banks. Corporate Governance: An International Review, 19(5), 418-436.‏ Retrieved from: doi.org/10.1111/j.1467-8683.2011.00882.x 19. Guner, A. B., Malmendier, U., & Tate, G. (2006). The impact of boards with financial expertise on corporate policies. National Bureau of Economic Research.‏ 20. Hamidian, M., Mohammadi, M., & Karimi Deldar, B. (2021). The effect of the characteristics of the board of directors, indicators of the power of the CEO and the financial crisis on the risk-taking of banks admitted to the Tehran Stock Exchange Organization. Scientific journal of new research approaches in management and accounting, 5(19), 467-434. [In Persian] 21. Harunklaei, K., Nabavi Chashmi, S. A., Barzegar, Q., & Dadashi, I. (2019). Explanation of the financial factors affecting the exit from helplessness of the companies admitted to the Tehran Stock Exchange. Economic Modeling Scientific Quarterly, 14(50), 103-129, [In Persian] 22. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency cost, and ownersip structure. Journal of Financial Economics, 3, 305–360. Retrieved from: doi.org/10.1016/0304-405X(76)90026-X 23. Kanojia, S., & Gupta, S. (2023). Bankruptcy in Indian context: perspectives from corporate governance. Journal of Management and Governance, 27(2), 505-545. Retrieved from: doi.org/10.1007/s10997-022-09630-z 24. Karkowska, R., & Acedański, J. (2020). The effect of corporate board attributes on bank stability. Portuguese Economic Journal, 19(2), 99-137. Retrieved from: doi.org/10.1007/s10258-019-00162-3 25. Konoplev, R. V. (2020). Ambar's corporate turnaround: from insolvency to expansion (Master's thesis), Instituto Universitário de Lisboa. Retrieved from: http://hdl.handle.net/10071/22278 26. Lakshan, A. M. I., & Wijekoon, W. M. H. N. (2012). Corporate governance and corporate failure. Procedia Economics and Finance, 2, 191-198.‏ Retrieved from: doi.org/10.1016/S2212-5671(12)00079-2 ‏ 27. Lohrke, F. & Bedeian, A. & Palmer, T. (2004). The role of top management teams in formulating and implementing turnaround strategies: a review and research agenda, International Journal of Management Reviews, (5)6, 63-90. Retrieved from: https://onlinelibrary.wiley.com/doi/full/10.1111/j.1460-8545.2004.00097.x 28. Maleki, M. (2019). Investigating the impact of managers' cognitive-emotional distortions and managers' organizational narcissism on the financial crises of companies listed on the Tehran Stock Exchange. PhD thesis, Faculty of Accounting and Management, Islamic Azad University, Rasht Branch, [In Persian] 29. Manimala, M. (1991). Turnaround management, lessons from successful cases, ASCI Journal of Management, 20(4), 234-254. 30. Mariano, S. S. G., Izadi, J., & Pratt, M. (2021). Can we predict the likelihood of financial distress in companies from their corporate governance and borrowing?. International Journal of Accounting & Information Management, 29(2), 305-323.‏ Retrieved from: doi.org/10.1108/IJAIM-08-2020-0130 31. Moradi, M., & Hosseinzadeh, S. (2016). The role of corporate governance in the financial crisis of companies: before and after the directive of internal controls. Journal of Financial Accounting Research, 9(3), 67-90. [In Persian] 32. Murphy, J. (2009). Turning around failing organizations: Insights for educational leaders . Journal of Educational Change, 11(2), 157–176. Retrieved from: https://link.springer.com/article/10.1007/s10833-008-9101-y 33. Nouri Sefat, M., Elholhiari, A., & Shahabi, S. (2021). Examining the effect of the characteristics of the board of directors on the company's illegal actions (evidence from the Tehran Stock Exchange). Investment Knowledge, 10(37), 254-241, [In Persian] 34. Olujobi, O. J. (2021). Combating insolvency and business recovery problems in the oil industry: proposal for improvement in Nigeria's insolvency and bankruptcy legal framework. Heliyon, 7(2), e06123.‏ Retrieved from: https://doi.org/10.1016/j.heliyon.2021.e06123 35. Pearce, J. A. & Robbins, K. (1993). Toward improved theory and research on business turnaround. Journal of Management, 19(3), 613-636. Retrieved from: https://www.sciencedirect.com/science/article/abs/pii/014920639390007A 36. Pretorius, M. (2009). Defining business decline, failure and turnaround: A content analysis.‏ SAJESBM NS, 2, 1-16. Retrieved from: http://hdl.handle.net/2263/9750 37. Pretorius, M. (2017). A framework for turnaround practitioners to assess reasonable prospect for ventures operating in the zone of insolvency. South African Journal of Business Management, 48(4), 57-70.‏ Retrieved from: https://hdl.handle.net/10520/EJC-c244e2408 38. Rahman Sarsht, H., Hassas Yeganeh, Y., Falah Shams, M., & Irandoost, M. (2013). Designing a strategic model for the process of reviving companies in crisis. Business Management, 6(3), 516-497. [In Persian] 39. Rahmani Norouzabad, S, Anwari Rostami, A. A., Khalili, K., & Mohammadi, E. (2019). Financing strategies of companies in normal and crisis conditions: Evidence from Tehran Stock Exchange. Asset Management and Financing, 8(2), 13-30. [In Persian] 40. Rezaei, Z. (2015). Corporate governance and business ethics, translated by Bita Meshaikhi, second edition, Business Publishing Company, [In Persian] 41. Rico, M., Pandit, N. R., & Puig, F. (2021). SME insolvency, bankruptcy, and survival: An examination of retrenchment strategies. Small Business Economics, 57, 111-126.‏ Retrieved from: doi.org/10.1007/s11187-019-00293-z 42. Rostami, S. (2017). The impact of corporate governance and profit management on the bankruptcy of companies listed in the Tehran Stock Exchange, Management and Accounting Studies, 4(3), 123-144, [In Persian] 43. Salleh, M.SH., & Rohana. O. (2016). Board of Directors Attributes as Deterrence to Corporate Fraud. Procedia Economics and Finance, 35, 82–91. Retrieved from: https://doi.org/10.1016/S2212-5671(16)00012-5 44. Schweizer, L., & Nienhaus, A. (2017). Corporate distress and turnaround: integrating the literature and directing future research. Business Research, 10(1), 3-47. Retrieved from: https://link.springer.com/article/10.1007/s40685-016-0041-8 45. Shah, S. A., Raza, H., & Hashmi, A. M. (2022). Corporate Governance and Corporate Financial Failures: Evidence From Pakistan Stock Exchange (PSX). International Journal of Management Research and Emerging Sciences, 12(1), 48-59. Retrieved from: doi.org/10.56536/ijmres.v12i1.193 46. Shukla, D. M., & Dwivedi, N. (2016). Influence of Board of Directors on Corporate Diversification: Evidence from India, Strategic Change, 25(5), 471–484. Retrieved from: doi.org/10.1002/jsc.2074 47. Simpson, W. G., & Gleason, A. E. (1999). Board structure, ownership, and financial distress in banking firms. International Review of Economics & Finance, 8(3), 281-292. Retrieved from: doi.org/10.1016/S1059-0560(99)00026-X ‏ 48. Situm, M. (2015). Recovery from distress and insolvency: A comparative analysis using accounting ratios. In Proceedings of the 6th Global Conference on Managing in Recovering Markets, GCMRM, 589-606.‏ Retrieved from: http://dr-situm.com/data/documents/Situm-2015-Recovery-from-distress-and-insolvency.pdf 49. Smith, M., & Graves, C. (2005). Corporate turnaround and financial distress. Managerial Auditing Journal, 20(3), 304-320. Retrieved from: https://www.emerald.com/insight/content/doi/10.1108/02686900510585627/full/html 50. Soesetio, Y. (2023). Good corporate governance mechanisms and financial performance in controlling financial distress. International Journal of Business and Social Science, 3(1), 14-26.‏ Retrieved from: doi.org/10.54099/aijbs.v3i1.542 51. Spremo, T., & Prodanović, S. (2013). The Turnaround Strategy and Courses Ofaction of Companies in the Crisis.‏ Zbornik radova Ekonomskog fakulteta u Istočnom Sarajevu, 7, 101-111. Retrieved from: https:// ceeol.com/search/article-detail?id=106151 52. Taheri Abid, R., & Rostami Volujai, B. (2017). The effect of agency cost on the relationship between the independence of the board of directors and the bankruptcy of companies listed on the Tehran Stock Exchange, the 7th National Conference on Accounting and Management Applications, Tehran, [In Persian] 53. Virk, G. K. (2017). The influence of board characteristics on corporate illegality. Journal of Financial Regulation and Compliance, 25(2), 133-148.‏ Retrieved from: doi.org/10.1108/JFRC-05-2016-0045 54. Wang, Z. J., & Deng, X. L. (2006). Corporate governance and financial distress: Evidence from Chinese listed companies. Chinese Economy, 39(5), 5-27.‏ Retrieved from: doi.org/10.2753/CES1097-1475390501