Corporate Governance, Intellectual Capital and Financial Distress of Listed Firms in Sub-Saharan Africa

Abstract

Financial distress often makes firms highly financially constrained due to limited external funds and high borrowing costs affecting a company’s investment and operational decisions. The number of listed companies steadily dropped on several security exchanges in Sub-Saharan Africa from 2017 to 2022 due to financial difficulties, an implication that financial distress is a persistent concern in the region. The effects of corporate governance and intellectual capital on financial distress are not well comprehended in the Sub-Saharan African setting. This research sought to fill the empirical gap related to the Sub-Saharan African context. The research was underpinned by agency theory, resource dependency theory, stakeholder theory, resource-based view and Knowledge-based view theories. The study targeted 146 selected firms listed on Sub-Saharan Securities Exchanges that are operational in Anglophone countries with less developed corporate governance structures, and non-hyperinflationary economies. Data was sourced from yearly financial statements and circulars published by firms for the years 2017 to 2021. Descriptive statistics were employed to summarize the data and logistic regression models were used in analysis. Research findings established that board size negatively influences financial distress while director remuneration was observed to have no significant effect. Board meetings and gender diversity were observed to positively influence financial distress. The findings further established that institutional, foreign, and state ownership significantly reduce distress. However, managerial ownership does not influence financial distress whereas a significant positive influence of local ownership on financial distress is observed. Concerning intellectual capital, a negative effect of intellectual capital efficiency on corporate financial distress was revealed. The research findings emphasize on effective governance structures relating to the firm’s board and ownership structure and the urgency of strengthening the intellectual capital base to ensure firms’ survival amidst today’s knowledge-based economy. The study recommends that non-financial firms maintain larger boards to enhance information efficiency and decision quality. In addition, non-financial firms should devise performance-based compensation mechanisms for the board and maintain an ideal frequency of board meetings. Moreover, non-financial firms should formulate ownership structure policies that enhance the firms’ stability through sound governance practices and embrace a proactive and holistic approach towards intellectual capital’s development to strengthen the competitive advantage base ensuring firms’ survival. The findings contribute to a broader discourse on effective corporate governance practices as potential solutions to mitigating financial distress. Furthermore, the findings will assist legislators in policy formulation regarding governance frameworks and aid managers in modifying their decisions for extenuating the effects of financial distress in sub-Saharan Africa.