The effect of MCCG compliance level on the likelihood of Malaysian firm financial distress

This study aims to examine the effect of the Malaysia Code of Corporate Governance (MCCG) compliance on the likelihood of financial distress among Malaysian industrial firms. Secondary data from Datastream and manually collected data from annual report disclosed in Bursa Malaysia for 78 listed firms under the industrial sector from 2017 to 2021 with a sample of 390 firm-year observations, are used to self-construct corporate governance index. Binary coding score is constructed to measure MCCG compliance in the Malaysia Corporate Governance Index (MCGI). Descriptive analysis, correlation analysis, regression model analysis on three models comprised of corporate governance element, mechanism, and self-constructed MCGI is used to examine the effectiveness of MCCG 2021 in mitigating financial distress on Malaysian PLCs. Using Binary Logistic Regression analysis, this study provides evidence that good corporate governance can also be achieved by adhering to the best practices proposed in MCCG 2021 as it positively reduces the likelihood of financial distress. MCCG 2021 provision is adequate for Malaysian firms to sustain their financial stability. This study enriches the literature on corporate governance by supporting that CG best practices reduce the level of financial distress in a listed firm. Interestingly, the appointment of senior independent directors, gender diversity, two-tier voting process elements, and risk management committees mechanism have negative significant relationship with the financial distress likelihood. These findings encourage listed companies in Malaysia to adhere to and implement good corporate governance practices guided by MCCG 2021, which has been proven to reduce the likelihood of financial difficulties and increase investor, regulatory, and stakeholder confidence. This research study is subject to several limitations. The observation period of the company year needs to be extended as this study involved only 35% of listed firms in the industrial sector in Malaysia.