■ 国際会計研究学会 年報 2019 年度第 1・2 合併号

Ⅴ

韓国セッション報告

A Study on the Relationship Between Board
Structure and Financial Risk in Chinese
Manufacturing Companies
Li Wen-ning
PhD Candidate, Wonkwang University
Hebei GEO University

Lee Dong-young
Wonkwang University

Abstract
The study of financial risk is a hot issue in financial accounting, because theexistence of financial risk endangers the life of the enterprise. Enterprises are caught
in a business crisis due to improper handling of financial risks. The financial crisis ofenterprises is caused by many factors: internal factors or external factors, such as theunreasonable corporate governance structure. As the core of the corporate governancestructure, the board of directors supervises the company’s management personnel on
behalf of investors, so the company has an inevitable responsibility for the financial
crisis. Therefore, this paper introduces the board structure into the research offinancial risk. From the four aspects of board size, board position setting, board
meeting frequency and board shareholding ratio, the paper combines theoreticalanalysis and empirical research to demonstrates the mechanism relationship of board
structure and corporate financial risk. The paper analyzes the impact of the four
aspects of the board of directors and proposes four hypotheses. As to the sample, theA-share manufacturing enterprises in China’s Shanghai and Shenzhen stock markets
were selected during 2011-2018. Descriptive statistics, correlation coefficient analysis
and linear regression analysis were carried out to study the impact of board structureon the financial risk level of enterprises. By the study of the impact of the four
aspects of the board on the financial risk of the company, it identified the factors thathave critical impacts on the financial risk of the company. The results showed thatthe board structure of Chinese manufacturing enterprises has a considerable impact
on its financial risk: the board size, the board meeting frenquency are significantly
positively correlated with the financial risk of the company; the board shareholding
ratio are not significant with financial risk. the board position setting are in anegative relationship with financial risks, but the statistical results are notsignificant. Focusing on the board size, the board positions setting, the board meeting
frequency and the board shareholding ratio, the paper points out how to improve theboard structure of the company to reduce its financial risk based on the analysis of
the article and the current status of the board structure of the listed manufacturing
companies in China. Suggestions for the reducing financial risk and the further
research direction of this paper were given and pointed out in the end.
Key words: board structure; financial risk; board size195

of typical violations of securities supervision

1

Introduction

andauditing

in

2016.

XintaiElectric

fraudulent issuance and information disclosure

1.1 Research Background andSignificancewere illegal among them, and the Shenzhen
Stock Exchange launched a major illegal

1.1.1 Research Backgrounddecommissioning procedure. It became theWith the advancement of the global

first case of mandatory delisting of fraudulent

economic integration process and the reform

issuance in China. Therefore, in the context

and innovation of the capital market system,of the booming Chinese manufacturing market,

China's economy is developed steadily. In

there are also many hidden dangers, and the2018, the gross domestic product ranks thedefects in corporate governance are increasingly

best in the world, contributing more thanobvious. Board governance, which is at a critical

20% to global economic growth, and reducing

position in corporate governance, is particularly

5% in energy consumption per unit of GDP.

important. Therefore, by analyzing andBy the end of 2018, the number of A-share

exploring how the board structure of thecompanies on Shenzhen and Shanghai stockcompany acts on financial risks at this stage,exchanges was 3,583, increased by 52.99%

the board structure is introduced into thecompared with 2,342 in 2011. The total

research of financial risk. Constructing amarket value at the end of 2018 was near to

positive and effective board governance48.59 trillion yuan, compared with 24.2 instructure is not only a means to effectively

2011. The trillion has increased by 100.79%.

prevent financial risks, but also an active

According to the “2018 White Paper on

measures to deal with financial crisis. In

Value Creation of Chinese Manufacturing

order to promote the standard operation of

Listed Companies”, there were 3,527 A-sharelisted companies in China, the China Securities

listedRegulatorycompanies,

including

2,224

Commission

and

the

State

manufacturing companies, accounting for

Economic and Trade Commission jointly

63.06%. The total market value of A sharesissued the “Guidelines for the Governance ofis 55.02 trillion yuan, of which the total

Listed Companies” on January 7, 2002, whichmarket value of manufacturing companies isclearly expounded the rules of conduct that

24.08 trillion yuan, accounting for 43.78%.

directors must abide by in detailed chapters.

Although manufacturing companies have

In 2007, the State-owned Assets Supervisionslightly decreased in volume and market

and Administration Commission also strictly

value compared with the first half of 2017,

ordered its subsidiaries to actively play the

manufacturing is still an important supportrole of the board of directors and strengthen

for the domestic economy.

supervision over business managers. In 2013,

On February 24, 2017, China Securities

the Board of Directors of China continuously

Regulatory Commission announced 20 cases

clarified the role of independent directors in

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A Study on the Relationship Between Board Structure andFinancial Risk in Chinese Manufacturing Companies

corporate governance. This shows it is

1.2 Research Content

imperative to deeply analyze the structure ofThis paper takes the manufacturing industry

the board of directors.

as a research sample, and empirically explores
the relationship between its board structure

1.1.2 Research Significanceand financial risk by selecting the research

The literature on the relationship between

data of listed companies in 2011-2018. The

the structure of the board of directors andarrangement of the text: Chapter 2, prior

the financial risks of enterprises is still rare.

research; Chapter 3, Empirical research design

It is only involved in the research on theof the relationship between board structure

relationship between corporate governanceand financial risk. Chapter 4, Analysis of theand corporate financial risks. Therefore, thisempirical results of the relationship between

paper draws on the research related toboard structure and financial risk. Chapter 5,

corporate governance and financial risks andconclusions and recommendations.

it analyzes the current situation of the board
structure based on the actual situation in
China, then it builds a systematic theory
between the board structure and the financial

2

Advanced Research andAssumptions

risks of the company, including the the board

2.1 The Concept of Board Structure

size,

directors’

The board of directors is the key to corporate

incentives of board structure. In practice, thegovernance and the core of establishing aphenomenon of corporate failure due to themodern enterprise management system. Dueboard governance failure is no longer new

to the reasonable arrangement of the board

enough to prove the importance of the board

structure, the behavior of the board of directorsof directors to the company. Therefore, it isand the incentives of the directors, whichvery urgent to conduct research on theseriously affect the effective functioning of

impact of board structure on corporate

the board of directors. This paper starts fromfinancial risks. Therefore, this paper chooses

analyzing the structural factors of the board,

from the board structure, the paper studies

and studies its impact on the financial risk of

the impact of the board structure of listed

the company, and then outlines the board

companies on the financial risks of enterprises

structure and the financial risks of the

based

the

company. The academic community has notpredecessors and the combination of standard

formed a unified understanding of the concept

research and empirical analysis. The paperof board structure. This paper believes thatfurther explores the deep-seated causes ofthe board structure is based on the corporate

financial risks in order to better prevent

governance, as the connection between thefinancial crisis in enterprises.

company’s shareholders and the management

directors’

on

the

behavior

researchandresultsofof the daily affairs of the management. In
197

order to make the board of efficient operation,

2.2 The Meaning of Financial Risk

scientific decision-making it is the key to

At present, there are narrow and broad

corporate governance of reasonable supervisionsense of the concept of financial risk. In a

and organizational structure, daily operation,

narrow sense, Ross, Westerfield, Jordan (1995)

duties of the board of directors and system

argued that the financial risk of a company

rules. The components of the board structurerefers to the risk of the company raising funds;

include: the board size, board meetings

in a broad sense, Chen Gongrong and Ai Zhiqun

frequency, the board positon setting and(2002) believed that: the financial risk referredincentives for directors.

to the unpredictable and control The factors

This paper refers to the selection of thethat cause the company’s actual income toboard structure indicators in the priordeviate from the expected return, and theresearch. According to the specific situation

possibility of damage to the company’sof the board structure of China, the selectedinterests.

indicators are: the board size, the board

Many scholars believed that the board

positions setting, the board meetings frequency,

structure has a lot to do with financial risks.

and the board shareholding proportion. The

Demsetz et al. (1985) in the process of studying

board size, that is, the existence of the board

the impact of board structure on businessof directors, is the premise of the effective

performance, with 511 US companies as

operation of the board of directors, specificallyresearch samples, empirical analysis showed

the number of directors in the board of directors.

that the impact of board structure on business

The two positions of the board of directors,

results was not significant, but in this researchthat is, whether the chairman and the generalprocess Among them, they unexpectedly foundmanager are the same person, if they arethat the structure of the board of directors

held by different people, they are separated

would have an impact on certain company-

from each other, and the same person is

specific risks, and the reasonable setting of

called the two-in-one. The board meetings

the board structure could reduce the risk.

frequency refers to the number of annual

The research results of Warfield et al. (1995)

board meetings. Incentives for directors refer

showed that the level of corporate financial

to the equal rights and obligations. Whilerisk would be affected by the number ofgiving the board of directors the obligation,

shares held by managers or institutional

they should also give appropriate incentives

investors. Qian Zhonghua (2009), believed

to improve the enthusiasm of the boardthat the unreasonable structure of the board

members. This paper selects the boardof directors was a key factor in the failure ofshareholding proportion as shareholders’corporate governance based on the board

rights, so that the directors can better

structure, which leads to financial distress inmanage the company from the perspective ofturn. In view of the board structure, he selectedshareholders.

the three aspects of equity concentration,

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A Study on the Relationship Between Board Structure andFinancial Risk in Chinese Manufacturing Companies

shareholder activity and the nature offinancial risks of enterprises from being

controllinganincreased. This paper attempts to explain its

empirical analysis. It was found that the

impact on the financial risk of the company

proportion of the largest shareholder and thefrom the three aspects of the composition,

number of shareholders meeting were inversely

behavior and incentives of the board of

proportional to the possibility of the company

directors.

shareholders

toconduct

being in financial distress. Non-state-owned
enterprises are more likely to fall into financial
difficulties than state-owned enterprises.

2.3.1 Research Status and Hypothesisof the Impact of Board Size on
Corporate Financial Risks
With regard to the impact of the board size

2.3 Advance Research and Assumptions
on the Relationship Between Board
Structure and Financial Riskon the financial risk of enterprises, there are

As the main body of corporate governance,

argued that the larger the board of directors,

the board of directors effectively governs thethe less the financial risk. The professional

enterprise through informal and formal

level, management skills, network resources

regulations. It becomes the central link ofof directors, all of these can provide better

corporate governance, and plays a pivotal

services to enterprises and improve corporaterole to safeguards the interests of the principal

performance,

and to seeks the sustainable development ofenterprises will be reduced. In empiricalthe enterprise. Therefore, the good or bad

research, Changanti, Mahajan, and Sharma

governance directly affects the interests of(1985) found that the board size of directors

all shareholders and the future of the entire

is inversely proportional to the probability ofenterprise.

bankruptcy. Chtourou et et al (2001) used

three conclusions abroad. Chagantietal (1985)

therebyfinancial

risk

of

The board of directors is elected by the

300 US companies as samples to study theshareholders’ meeting and it is the link between

relationship between board structure andthe shareholders and the managers who handle

earnings management. The results showed

daily affairs. Thus it has a crucial impact onthat the board size of directors is inversely

the company’s business development and it

proportional

is like a “double-edged sword” If it is used

Conversely, another group represented byproperly, it can make good profits, but if it isJensen (1993) believed that the smaller theused improperly, it may cause serious financial

size of the board, the better it could promoterisks and even cause discruptcy. Therefore,

the development of the company, the more

it is necessary to improve the board structure

efficient the decision-making, the better theso that it can reconcile the contradictions

response to the ever-changing market, andamong shareholders, the board of directors

thus the less of the enterprise financial risk.

and the managers better. It prevents theSome of the empirical research supports thistoearnings

management.

199

conclusion, Lipton. M&LLorsh’s empirical

too large, the cost increases, the members

statement in 1992: Whenboard sizeexceeded

are highly dependent, and the motivation to

the red line of 10 people, its work efficiency

perform their duties is insufficient. Whenwas getting lower and lower, and the benefits

managing the risks, when dealing with risks,brought by the increase of personnel could

they will rely on others to deal with the

not make up for the shortcomings caused byrisks. Financial risks are getting worse.

mutual communication; They were also more

Secondly, the larger the size of the board, thelikely to be manipulated by corporate

more difficult it is to coordinate andmanagement. The empirical results of Lipton

communicate information among members.

Lorsch (1992) showed that small-scale boards

Because the board members have different

did better in internal control, which reduced

backgrounds,

the company’s risk. The third view is that thepreferences, ways of thinking, and different

correlation between board size and corporate

interests, communication and coordination

financial risk level is not significant. Abbott

between them becomes difficult, and it is(2000) and others selected 83 financial

difficult to reach a consensus, which leads tomisstatement companies from 1991 to 1999.

inefficient decision-making. Therefore, thisAfter pairing, they found that there was no

paper believes that as the size of directors

significant correlation between board size

increases, the governance efficiency of theand financial misstatement.

board of directors will decrease, which inknowledge

levels,risk

The board size of directors is an importantturn will affect the financial crisis. Therefore,

part of the board of directors, and it has a

the paper makes the following assumptions:significant impact on the effective exercise of

Hypothesis 1: The board size of directors is

its supervisory and decision-making functions.

positively correlated with the level of financial

According to the provisions of the “Company

risk of the company.

Law” of China, the number of board of directorsof a company should be more than 5 personsof directors of the company, the minimum

2.3.2 Research Status and Assumptionsof the Impact of the Two Positionsof the Board on the Financial Risks
of Enterprises

size of the board of directors is guaranteed,

There are also two different voices about

which is beneficial to the function of thethe relationship between the two positions

board to a certain extent. However, board

and financial risks. One view is that thesizeis not as large as possible. If it is too

combination of the chairman and the generallarge, it will constrain its positive effects.

manager is positively related to the financial

This paper believes that, firstly, a large-scalerisk of the company. Molz (1988) supported

board of directors will make directors lazy

this conclusion in theoretical research. The

and “free rider” mentality. If the board size isresults show that when the two roles ofand less than 19 persons. Although there areminimum regulations on the number of board

200

A Study on the Relationship Between Board Structure andFinancial Risk in Chinese Manufacturing Companies

chairman and general manager are separated,

According to the principal-agent theory,the management of the board of directors ofthe main conflict of interest in the agency

the company is greatly reduced, and the

problem is the contradiction between thefinancial information of the company is moremanagers and shareholders of the general

open and transparent. On the empirical side,

manager. Since the main role of the chairman

Efendietal (2006) conducted a study of 33

is to supervise the hiring, reward andcompanies that were in financial crisis in thepunishment, evaluation and dismissal of theUnited States in 2001 and 2002. The

general manager and the board meeting,conclusions show that companies with bothwhen the chairman and the general manager

directors and general managers are moreare united, he must perform both thelikely to have a financial crisis. Dechow (1996)

decision-making and the supervision. All

also proved this conclusion through empiricalhave a key role, which makes the relationshipresearch. In addition, there is no significant

between the board of directors and thecorrelation between the two positions andgeneral manager complex, and it is easy to

the financial risk level of the company.

cause the internal supervision mechanism to

Empirical

andlose its role. When the chairman (general

Chtourouetal show that the correlation

manager) uses the dual identity to interfere

between the earnings response coefficientwith the operation of the enterprise, theand the two positions is not significant.

enterprise management is vulnerable to a

There are two very different views on the

few people “slap the head” The impact of therelationship between the relationship between

decision causes the individual to act arbitrarily,

the chairman and the general manager andthereby increasing the financial risk of thethe financial risks of the company. Zhu Yuenterprise. In addition, being a two-time(2006) based on the theory of stewardship,

executive is easy to create a feeling of prideconcluded that in the case of two-in-one,and complacency. If supervision is weak,corporate financial risks will be better

more

detected and contained in time, which canmanagement measures may be implemented,

effectively reduce the financial risks ofwhich may result in poor business operations

enterprises. In contrast, Dong Nanyan andand increased financial risks. If the two

Zhang Junrui (2007)

pointed out that

positions are separated, the board of directors

companies with separate jobs are less likely

and the management are more independent.

to receive non-standard audit opinions than

They perform their duties. The board of

those with two jobs. Yu Fusheng (2008) Liu

directors can more effectively supervise the

Yinguo and Wu Xiaqin also found throughmanagement and ensure the scientific nature

research that the financial risk of the twoof the resolution, which will make the company

divisions is lower than that of the twomore stable and have lower financial risks.

divisions.

Therefore, the principal-agent theory insists

studies

such

as

Petra

aggressive

financial

policiesand201

that the two positions should be separated to

at a time. Conger (1998), Biaoxie (2005) andmaintain the effectiveness and independence

domestic scholar Xie Deren (1999), Sun Jianof the board of directors.

(2008) and Qian Zhonghua (2009) also holdThis paper believes that the problem of

the same view. Another point of view is that

Chinese enterprises at present is that rights

most of the board meetings are in the form of

are

be

walking. Discussing and discussing the daily

decentralized. One, because Management isaffairs of the company does not involve thenot perfect enough, supervision is weak, andcompany's substantive problems, nor does it

excessive concentration of rights will cause

play a role in preventing financial risks. In

more harm than good; on the other hand, themost cases, the financial risks of the company

development goals of enterprises can be fully

are already very high. Seriously, the meetingachieved through the communication ofis only a research strategy. In this logic, thesenior executives, and the combination of themore frequent the board meeting, the decline

two positions cannot solve the problem

in corporate performance. Jensen (1993) andfundamentally. Therefore, the separation of

Vafeas (1999) and domestic scholars Gu Yu,

the two positions in our country is better

Yu Dongzhi (2001), Shen Yifeng, Zhang

than the integration of the two positions.

Junsheng (2002), He Ping (2009).

tooconcentrated

and

need

to

Therefore, this paper proposes the following
assumptions:

The frequency of board meetings, that is,
the number of times the board of directors

Hypothesis 2: The relationship between

meets within one year, explains to a certain

the position of the chairman and the generalextent the board’s practice of its supervisory

manager is negatively correlated with the

responsibilities. According to China’s “Company

level of financial risk.

Law”, a company limited by shares must meetat least two board meetings each year. The

2.3.3 Research Status and Hypothesisof the Impact of Board Meeting
frequency on Corporate Financial
Risks

more board meetings, the more positive thedirectors’ governance behavior and the more
complete the management of the company.
As a result, more ideas will collide and theRegarding the number of board meetings,

directors’ expertise will be used more fully,

the research conclusions at home and abroad

which will help the board of directors to makeare relatively uniform, and there are roughly

decisions and reduce the company’s finances.

two factions. Lipton & Lorsch (1992) pointed

risk. Another point of view is that companies

out that the more meetings are held, thewith good operating conditions often do not

more opportunities for company directors toneed too much board governance, because

participate in management, and the greater

the company is operating normally, andthe enthusiasm, the board should meet atexcessive external force promotion is a bit

least once every two months, at least one day

redundant. The board of directors is like a202

A Study on the Relationship Between Board Structure andFinancial Risk in Chinese Manufacturing Companies

fire-fighting facility. The higher the frequency

the company. Wright (1996) and COSO (1999)

of board meetings, the worse the company’s

also demonstrated from an empirical point of

performance. Moreover, there are many

view that the higher the proportion of directors’

problems in the board meetings of Chinese

shareholding, the greater the false component

enterprises, such as low attendance rate, shortof the company's financial report.

agenda, poor implementation, imperfect rules

In the modern companies, the board of

and regulations, etc. Most of the meetings

directors

are unnecessary discussions and mutualshareholders to supervise the day-to-day

responsibilities for trivial matters, so thatmanagement activities of company executives.

there is no such thing. Positive effects will

Its behavior is often not well measured,

only increase the burden on enterprises.

especially the measurement of its work effort

Therefore, our board meeting is only a formal

has certain doubts. Under the premise ofwalk through the scene. This article insists“economic man”, the board of directors maythat the frequency of board meetings is highdamage the interests of the principal for its

and often the performance of the company is

own interests, or may be opportunistic

poor. The more the meeting is held, the more

behaviors such as laziness, risk avoidance,

likely it is that the company will be caught infree rider. In order to circumvent this moral

a financial crisis. Therefore, this paper proposes

hazard, they need to be appropriately

the following assumptions:motivated, including material and equity.

accepts

theentrustmentof

Hypothesis 3: The board meeting frequency

Only by ensuring their material living

is positively related to the level of financial

standards will they be able to supervise

risk of the company.

corporate executives wholeheartedly andhelp them make informed decisions to avoid

2.3.4 Research Status and Hypothesisof the Impact of Shareholding
Ratio of Directors on Corporate
Financial Risks

corporate financial risks. However, the roleof material incentives is temporary, and it
does not make the director’s vital interestsand shareholders’ interests tend to be so, so

Jensen Ruback (1983) confirmed in theory

equity incentives are needed. At present,that the higher the shareholding ratio of

equity incentives are generally applicable. It

directors of listed companies, the more likely

is based on the future of the company, andthe board of directors to self-interest in orderthe salary incentives are focused on the present.

to maintain their status and high income,

It keeps the director’s personal interests andveto some of the company’s value in the long

the long-term interests of the company highlyrun. However, the loss of some immediate

consistent, and the directors will pay closeinterests of the project is not conducive to theattention to the future development of the

improvement of the company’s performance,company and more effectively supervise thewhich in turn increases the financial risk ofcompany’s senior management. Moreover,203because the directors hold shares, the board

this paper selects the companies in Shanghaiof directors and the shareholders realize theanduniformity of interests. When the shareholders

consecutive years from 2011 to 2018 forof the company and the company executives

empirical analysis. As a dominant industry

conflict, they will make the decisions madein China, the manufacturing industry plays

more in line with the shareholders’ rights. Of

an important role in the national economy.

course, we must master the degree of equity

The choice of a single industry can effectively

incentives. If the equity is “excessively

limit the impact of the macroeconomic

motivated”, the board will lose its originalenvironment on the company’s financial

independence and objectivity and harm thesituation, and eliminate the forecast bias

interests of small and medium shareholders.

caused by different industries. In order to

Directors are likely to be involved inensure the validity and accuracy of themanipulating surpluses and profiting by

empirical conclusions, the samples are screened

affecting stock prices. However, if “insufficient

one by one according to the following principles:incentives”, it will not achieve the desired

In order to ensure the validity andeffect. Since the equity incentive has justrobustness of the data, this paper selects

been introduced to China, the application iscompanies listed on the Shanghai and the

not universal. Even if there is equity incentive,

Shenzhen Stock Exchange during 2011 andit will only give individual incentives to a few

2018. In addition, the A-share listed companies

directors on the board of directors. Therefore,that issued both B-shares and H-shares were

Chinese enterprises generally face the problem

excluded to prevent the B-shares or H-sharesof “insufficient incentives.” Therefore, thisissued by certain companies from interfering

paper proposes the following assumptions:with the financial data in the A-share market.

Shenzhen

Stock

Exchangefor8

Hypothesis 4: The shareholding ratio of
directors is negatively correlated with the

3.1.2 Data Source

financial risk level of enterprises.

This paper measures the relationshipbetween the financial risk level and the

3 Research Design of theRelationship Between Board
Structure and Financial Risk
3.1 Sample Selection and Data
Sources
3.1.1 Sample Selection

structure of the board of directors. The main
source of the data is the corporate governanceandcompany

research

moduleinthe

CSMAR database. The data are sampled
based on the above screening criteria. The
data is continuously from 2011 to 2018, witha total sample size of 14017.

Based on the prior research of therelationship between the board structure

3.2 Research Variables

and financial risk of companies in China,

The variables are divided into dependent

204

A Study on the Relationship Between Board Structure andFinancial Risk in Chinese Manufacturing Companies

variables, Independent variables and control

by selecting the board size, the two positions

variables.

settings of the board, the board meetings
frequency, and the proportion of directors'

3.2.1 Dependent Variables

shareholdings. Board size is measured by theThis paper adopts the Z-score model proposed

number of directors. The setting of the twoby the American scholar Altman in 1968 topositions of the board is based on whether

measure the financial risk level of the sample

the roles of chairman and general manager

companies, and it uses the average value of Z

are combined. The frequency of board meetings

calculated from the financial indicators ofis expressed in terms of the number of meetings

the listed companies in the manufacturing

held by the board of directors each year. The

industry from 2011 to 2018. The Z-scoreshareholding ratio of directors is expressed

model measures the financial risk moreas the proportion of shares held by board

comprehensively and can fully reflect themembers at the end of the year as a percentage

listed company’s ability in financing, debt

of the company‘s total shares. See Table 3.1.

repayment, operation, profitability and it isin line with the definition of financial risk in

3.2.3 Control Variables

this paper. In addition, the Z-score modelThis paper refers to previous research results

predicts the company’s financial status withand selects the return on assets, company

high accuracy and simple operation, and has

growth and asset turnover rate as control

great use value at home and abroad. Therefore,variables. Although they are not the main

this paper refers to the previous research,cause of financial crisis, the board structureusing Altman’s Z-score model as a substituteoften works through these ratios, so it isfor financial risk to measure the financial

necessary to set such control variables. Seerisk level of listed companies in China. The Z

Table 3.1.

score is inversely proportional to the financial

Return on assets (ROA): It is the ratio ofrisk of the enterprise. That is, the smaller

the company’s net profit to the average total

the Z score, the greater the financial risk,

assets, which measures the profitability. The

and the larger the Z score, the smaller thehigher the ROA, the stronger the company’s

financial risk of the enterprises.

profitability and the more financial risks it
can bear.

3.2.2 Independent Variables

GROWTH: It measures the growth capacity

The board structure is the explanatoryof a company. The faster a company grows,

variable of this paper. It mainly studies thethe larger the value. A fast-growing enterprise

influence of board structure on the financial

shows that it has strong adaptability torisk level of enterprises from three aspects:

external environmental changes and has aboard composition, director behavior andfast response, so it may face less risk. This

director incentive. Financial risk is studied

paper uses the total asset growth rate as a205surrogate variable for the company’s growth.

measure the operational capability. It is the

The weaker the growth, the smaller theratio of the net sales income to the averagecompany’s investment and financing needs,

total assets in a certain period of time. The

so the lower the level of risk faced by thehigher the total asset turnover rate, thecompany, the more favorable the company’s

stronger the sales ability of the enterprisestability.

and the better the efficiency of asset

The asset turnover rate (TAT) is used toinvestment.

<Table 3.1> The list of specification of variables
Variable

Variable type

Variable name

VariablesymbolDescription

Dependent
variable

Financial risk

Z valueZ

The higher the Z value, the less therisk, The lower the Z value, thegreater the risk.

Board
composition

Board size

Bsize

Total number of board members

BconsisThe chairman and the generalmanager are in one taking 0,
otherwise taking 1

BfrequNumber of board meetings held
within one year

BratioNumber of shares held by directors /total number of shares

Board
composition
Independent
variableBoard
behavior
Board
incentive
Profitability
controlvariablethe twopositionssettings of theboard ofdirectors
the frequency
of board
meetings
shareholding
ratio ofdirectors
Return on
assetsROA

GrowthabilityCompany
growthGROWTH

Operatingcapacity

Asset turnover

TAT(total profit + interest expense) /average total assets(ending assets of the year- beginning
assets of the year) / beginning assetsof the year
Net operating income / average total
assets

3.3 Model Construction

the director’s shareholding ratio are theAccording to the previous theoretical analysis

independent variables. The four independentpart, we can see that the structure of thevariables are represented by “BSTRU” in theboard of directors has a certain impact onmodel. Taking the financial risk Z as thefinancial risks. What is the relationshipdependent variable, the multiple returns of

between the two, still need to be further

the return on the return on the asset return

empirically tested. For this reason, the four

rate, asset growth rate and asset turnoverfactors of the board size, the board’s two

rate. The regression model is as follows:

positions, the board meeting frequency and206

A Study on the Relationship Between Board Structure andFinancial Risk in Chinese Manufacturing Companies

Z=β0+β1BSTRU1+β2ROAi,t+β3GROWTHi,t+β4TATi,t+ε

4 Analysis of the Empirical(Model)In this paper, we use unbalanced panel

Results of the Relationship
Between Board Structure
and Financial Risk

data analysis of Stata14 to make descriptive
statisticalanalysisofthedependent,

independent and control variables, and obtainthe maximum, minimum, median, mean and

4.1 Descriptive Statistics

standard deviation of each variable. Table

4.1.1 Variable Descriptive Statistics

4.1 shows:<Table 4.1> Descriptive statistical analysis of variables
N

Mean

P50

SD

Min

Max

Z

14015

9.29

3.44

21.38

1.00

778.17

Bsize

11587

8.53

9.00

1.56

5.00

14.00

Bconsis

6355

0.31

0.00

0.46

0.00

1.00

Bfrequ

14007

9.41

9.00

3.48

4.00

21.00

Bratio

10396

0.05

0.00

0.13

0.00

0.60

ROA

14017

0.06

0.05

0.07

(0.22)

0.24

GROWTH

12192

0.19

0.10

0.34

(0.31)

1.89

TAT

12191

0.68

0.59

0.40

0.10

2.44

Through descriptive statistical analysis of
the above variables, we can see somecharacteristics of financial risks and board
structure of the companies in China:

financial status is not stable enough andthere may be financial risks.
(2) In terms of the size of the board of
directors, the standard deviation is 1.56,(1) In terms of the Z value of the financial

indicating that the size of the board of directors

risk level, as shown in Table 4.1, the minimum

varies greatly among different enterprises,

value of 1, the difference with the maximum

but the number of people with the largest

value of 778.17 is quite different, indicating

number is 14 and the minimum is 5, thethat there are large differences in the level ofcompany law of China clearly stipulates: The

financial risk faced by different companies.

number of board members should be greater

The median of 3.44 and the average of 9.29

than 5 and less than 19. It shows that theare both greater than 2.675, indicating thatscale of the board of directors of each enterprise

more than half of the companies have good

has reached the minimum requirements offinancial status and low financial risk, but

the company law.

the median of 3.44 is close to 2.675, indicating(3) The two roles of the chairman and thethat there are still a few companies whose

general manager are on the one hand, with207

an average value of 0.31. This indicates that

great impact on the accuracy of the model.

the chairman and general manager of most

Therefore, before the regression analysis, theenterprises are served by the same person

correlation analysis of the independentand means that the two positions are in one

variables is needed to eliminate those highly

mostly in Chinese Manufacturing companies.

relevant variables. The most commonly used

(4) In terms of the frequency of board

correlation of analytical variables is themeetings, the maximum value 21 and thePearson correlation coefficient. However,minimum value 4 differ by 17 and thewhen the explanatory variables are more,

standard deviation is 3.48, indicating that

Pearson reflects the degree of linear correlation

the frequency of board meetings between

between variables. Therefore, this paper

enterprises is quite different and uneven; theuses the partial correlation coefficient (r) toaverage value is 9.41, indicating that mostreflect any two. The relationship between

enterprises remain 9 board meetings a year.

variables, when describing the correlation(5) Although the highest proportion of

between variables, is divided into the following

directors’ shareholdings has reached 60%,

four cases shown in table 4.2:

the current shareholding ratio of directors in<Table 4.2> r value range and correlation table

China is generally low, with an average of
only 5%. Even many corporate directors do

R range

Correlation

not hold company shares. The incentive roler≥0.8

Highly correlatedof personnel has not received enough attention

0.5≤r＜0.8

Moderate correlationin the operation of some enterprises.

0.3≤r＜0.5

Low correlationr<0.3

irrelevant

4.2 Correlation Analysis
When modeling, if there is multiple

The variable correlation analysis is shown

collinearity between variables, it will have ain Table 4.3:

<Table 4.3> Variable Correlation Analysis Table
Z

Bsize

Bconsis

Bfren

BratioROAGROWTH

Z

1

Bsize

0.019

1

Bconsis-0.060-0.1741

Bfren-0.058

-0.01

0.015

1

Bratio-0.091-0.095

0.085

0.011

1

ROA

-0.060

0.006

0.068

-0.0960.029

1GROWTH-0.125-0.065

0.123

0.082

0.080

0.261

1

TAT

0.086

0.062

-0.024-0.052-0.045

0.250

0.029

208

TAT

1

A Study on the Relationship Between Board Structure andFinancial Risk in Chinese Manufacturing Companies

It can be seen from Table 4.3 that thethe board structure and establishes four

correlation coefficients of the four board

basic assumptions about the relationshipstructure variables and the three control

between board structure and financial risk.

variables selected in this paper are less thanIn order to verify these hypotheses, this

0.3, indicating that there is no multicollinearity

paper selects appropriate indicators andin the regression model constructed by theseestablishes multiple regression models for

explanatory variables. Therefore, regression

empirical research. The Husman test is used

analysis can be performed.

first, and the model is applied to fixed effectregression. The regression results are shown

4.3 Regression Analysis

in Table 4.4:

This paper analyzes the four dimensions of<Table 4.4> Results of regression analysis
Variables
Bsize

Bsize

BconsisBfren(-2.75)
0.408

Bconsis-0.78-0.123***

Bfrequ(-3.64)-0.09

BratioROAGROWTH
TAT_cons

Bratio-0.364***(-0.11)-4.628*-0.647-5.052***-2.865(-1.92)(-0.20)(-2.65)(-1.50)-1.226***-1.127**-0.746***-0.553**(-3.86)(-2.56)(-2.60)(-2.21)2.497***

2.528***

2.065***

2.787***

-4.26

-3

-4.13

-5.32

11.043***

6.572***

8.951***

5.598***-9.43-11.51-18.91-16.82
Note: The standard deviations are in brackets. *, **, *** indicate significant at 10%, 5%,
and 1% respectively.

According to the results of Table 4.4, wewith assumption 1. It shows that the size of

can make the following conclusions: The

the board of directors of manufacturing

regression coefficient of board size (Bsize)

companies in China has a significant impact

and Z value is -0.364, indicating that the sizeon the financial risks of enterprises. Theof the board of directors is positively correlated

larger the size of the board of directors, thewith financial risk and it is significant at thegreater the financial risk of the company. It

1% confidence level. The resulet is consistentshows that the size of the board of directors
209

is too large, the cost increases, and thetheoretical hypothesis 3. The high-frequency

members

Whenboard meeting actually shows that the company

managing the company or when dealing withhas fallen into a financial crisis. The board

risks, they will rely on others to spread themeeting is only to solve the crisis and study

risks. The larger the board is, the more

and formulate countermeasures.

arehighlydependent.

difficult it is to coordinate and communicate

The regression coefficient of the directors’

information among members. The larger theshareholding ratio (Bratio) and Z value issize of the board, the more obvious the-0.09. This shows the shareholding ratio of

dysfunction. Due to the above reasons, thethe directors is positively related to thesize of the board of directors and the risk offinancial risk level of the enterprises, which

the company are closely related.

means that the greater the shareholding

The regression coefficient of the board’s

ratio of the directors, the greater the financial

two positions setting (Bconsis) and Z value isrisk of the enterprise. However, it did not

0.408, which indicates that the relationshippass the significance test and was inconsistent

between the chairman and the generalwith the previous hypothesis 4. The higher

manager is negatively correlated with thethe shareholding ratio of the directors offinancial risk level. That indicates the financial

listed companies, the more likely the board

risk of the two-in-one enterprise is more thanof directors to keep self-interest. In order tothe two positions separation. However, it

maintain their status and high income, thedidn't pass the significance test and wasboard of director will veto against someinconsistent with the previous hypothesis 2.

projects that increase the value of the company

This may be separated from the roles ofin the long run, but lose some immediatechairman and general manager. Although it

benefits, which is not conducive to the

can avoid the disadvantages brought by thecompany’s performance. The increase, which

two jobs, it also reduces the decision-making

in turn increases the financial risk of theefficiency and responsiveness of the company.

company.

In this era of time-honored, the benefits are

The relationship between each control

greatly reduced. Increased risk. This leads tovariable and financial risk can be seen frominconsistencies in relevance.

the regression analysis table in Table 4.4: (1)The regression coefficient of the frequency

The return on assets and the Z value areof board meetings (Bfrequ) and Z value issignificantly negatively correlated at the-0.123, which is significant at the 1% confidence

10% level, that is, the higher the return onlevel. That means the number of board

assets of Chinese listed manufacturing

meetings is positively related to the financial

companies, the higher the financial risk. low.

risk level of the enterprise, and the more the(2) The growth of the company is significantly

number of board meetings, the greater thenegatively correlated with the Z value, which

financial risk of the company. Support theindicates that the greater the company’s

210

A Study on the Relationship Between Board Structure andFinancial Risk in Chinese Manufacturing Companies

growth, the greater the financial risk. (3)greater the financial risk of the company. (2)The asset turnover rate ROA is positively

The setting of the two positions of the board

correlated with the Z value at the level of 1%,

of directors did not pass the significant test,

indicating that the higher the asset turnover

but the setting of the two positions of therate of the manufacturing enterprises, thechairman and the general manager was

smaller the financial risk.

positively related to the financial risk, thatis, the separation of the two positions was

5 Conclusions and Recommendations

less than the financial risk of the two jobs.
(3) There is a significant positive correlation

5.1 Conclusions

between the number of board meetings andWith the gradual improvement of thecorporate financial risks. The more meetingssocialist market economic system, the modern

the board meets, the greater the financial

enterprise system is becoming more and morerisk the company faces. (4) There is a

popular, and the role of the board of directors

significant positive correlation between thein corporate governance becomes more andshareholding ratio of directors and the financial

more important. Whether the board ofrisks of enterprises. However, it did not passdirectors can fully play its supervisory role

the significance test and was inconsistent

directly affects the company’s operatingwith the previous hypothesis 4. Under the

performancestatus.

premise of “agent”, the board of directors

Therefore, the structure of the board ofstarts from its own interests and makes

directors has an important impact on thesome measures that are not conducive to thelevel of financial risk of the company. Thisdevelopment of

paper selects the A-share manufacturing

increasing the risk of the enterprise.

andmanagement

theenterprise, thereby

enterprises in Shanghai and Shenzhen from2011 to 2018 as samples, and studies the

5.2 Recommendation

impact of board structure on the financial

After research, it is concluded that therisk level of enterprises through a combination

board size has a significant impact on theof theory and empirical methods. conclusionlevel of financial risk. According to common

as below:sense analysis, the appropriate board size

(1) The size of the board of directors passed

and knowledgeable, competent, and responsible

the significant test, and the size of the board

board members should be able to greatlyof directors was positively correlated withimprove the efficiency of corporate governance,

the financial risks of the company. It shows

thereby reducing or even avoiding financial

that the size of the board of directors of listed

risks. In order to completely change thecompanies in China has a significant impact

statuson the financial risks of enterprises. The

enthusiasm of the board of directors inlarger the size of the board of directors, thecorporate governance, we must respect the

quo

and

activelymobilizethe211

status of the board members, fully recognize

There are also some limitations. The board of

the importance of the board, minimize thedirectors has other limitations, such as theunnecessary intervention of the shareholders’ratio of directors to men and women, academic

meeting, and actively explore the most

distribution, work history, etc. can also be

suitable for itself. The size of the board ofused as further research directions.

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