Governance Spillover Effects From Macro- to Microlevels: Investigating How National Governance Indicators Impact Firm's Financial Distress

We investigate the impact of national governance (NG) on firm-level financial distress (FD), by using agency theory. By analyzing the World Governance indicators’ NG components, namely, “voice and accountability, regulatory quality, political stability and absence of violence/terrorism, rule of law, government effectiveness, and control of corruption”; we find that NG fosters corporate FD. Using balanced panel data of Indian listed companies for a period of 8 years (2016 to 2023), we find that a positive relationship between most NG components and firms' Altman Z scores (reduced distress) is evident. However, for one component of NG, i.e., voice and accountability, the counterintuitive negative effect on Altman Z scores indicates increased regulatory and political volatility. We emphasize the vitality of NG for practitioners and policy-makers. The study is novel in its comprehensive and unique way of examining all the underlying factors of NG to curtail agency problems at firm-level FD. Thus, spillover effects of governance from macro to micro levels are evident.