Predicting Bankruptcy for Banking in the EU using Governance

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TABLE OF CONTENTS

CHAPTER 2: LITERATURE REVIEW1

Corporate governance1

Bankruptcy3

Identification through governance4

Bankruptcy triangle and fraud6

CHAPTER 3: METHODOLOGY8

Introduction8

Classification of research methods8

Multi-method studies8

Mixed method studies9

General design9

Investigation and Literature Review10

Sampling10

Qualitative versus quantitative10

Rationale for a Qualitative Study13

Rationale for a Quantitative Study13

Analysis and Conclusion14

Data collection14

Instrument15

Ethical Considerations15

Justification of the research methodology17

Validity17

Philosophical Framework or Paradigm18

Literature Review of the Study19

Underlying assumption20

Significance21

Research Limitations21

REFERENCES23

CHAPTER 2: LITERATURE REVIEW

Corporate governance

One of the key questions in the corporate governance literature is what prevents corporate elites such as directors and managers from acting opportunistically. Much of the current research has focused on governance mechanisms such as the direct monitoring of corporate elites (e.g., by shareholders with large ownership positions), the establishment of incentives designed to align the interests of the corporate elite with shareholders, and pressure from both the managerial labour market and the market for corporate control.

However, there may be some contexts in which ownership and governance structures prescribed by agency theory actually disincentives appropriate fiduciary behaviour and result in corporate elites becoming more, rather than less, likely to act opportunistically. It particularly expects this to be the case when corporate agents are required to transition their loyalties from one principal to another. It investigates this subject in the context of E.U bankruptcy, during which time the fiduciary duties of the corporate elite are owed primarily toward creditors rather than shareholders.

In such a situation, it expect that high-powered governance mechanisms may encourage corporate directors and officers to act in the interests of shareholders at a time when their fiduciary duty requires them to act on behalf of creditors. The prediction of corporate bankruptcy is the subject of numerous empirical studies, for thirty years. To this end, it outlines the common approach while highlighting the governance application. Corporate governance research has evaluated the qualitative aspects of banks and whether they are shareholder or stockholder focused. However, it is only recently that research has quantified the qualitative aspects of company mission statements. A governance index was first created by Forcer (2007), which uses the index as a proxy for shareholders rights (Forcer 2007, 19).

After entering bankruptcy, the filing organization negotiates with its creditors to reach a settlement that can be approved by the bankruptcy court. If negotiation is successful and court approval is obtained, the bank may re-emerge as a public bank. However, although a bank may enter bankruptcy in order to seek reorganization, in some cases it may be forced into liquidation if an acceptable plan cannot be constructed. Research indicates that the denouement of the bankruptcy filing and settlement process on average takes months, although in some cases it can take years to successfully exit bankruptcy (Finley 2007, 10).

The study will highlight the prediction of bankruptcy in EU by using governance. Long stays in bankruptcy typically have a negative impact on the bank because of the time and attention which bankruptcy proceedings require of top managers and directors and because it is more difficult for the bank to make significant strategic moves while in bankruptcy, thus limiting ...