9. Conclusion
We contribute to the ongoing debate in literature: Does corporate governance quality affect default risk? It is timely and imperative to investigate the relationship between CGQ and default risk in the Australian context for three reasons. First, CGQ is the prime reason behind a series of defaults that occurred in Australia. Second, the Australian context—High agency costs, high ownership concentration, weak market for control and low litigation risk—is unique, so findings from other countries may not directly apply to Australia. Third, the scant Australian literature provides inconclusive evidence on the relationship between CGQ and default risk, when the endogeneity bias is considered.
Compared to Schultz et al. (2015), who use the sample of large Australian firms over the short period of 2001 to 2007, we provide additional evidence on the governance-default linkage by investigating such a relationship using firms from the different size groups (small, medium and large) over the long period from 2001 to 2013. Moreover, compared to the individual governance mechanisms used by Schultz et al. (2015), we employ a composite internal governance score based on the Horwath report. Furthermore, unlike Schultz et al. (2015), who employ only a market-based (DD and PD) proxy, we employ both market-based (DD, CDS and PD) and accounting-based (ALTMAN) proxies for default risk. Finally, we address endogeneity bias by using lagged independent variables, an instrumental variable approach, and dynamic panel data estimation techniques.
