Purpose: This paper examines how firm-level governance factors influence the fate of financially distressed private firms. In other words, it explores why some firms recover from financial distress while others go bankrupt.

Design/methodology/approach: Our analysis is based on 152 740 private limited firms for the years 2002-2022 comprising of 994 870 firm-year observations. We construct the financial distress measure following Bruynseels et al. (2011) strategy. During the sample period, 134 107 unique firms were in financial distress in t and 14 521 filed for bankruptcy in t+2, 85 296 firms turnaround for two consecutive years (i.e., t+1 & t+2), 34 290 firms continued to be in financial distress, and 18 633 firms were never in financial distress. We use logistic regression to estimate the likelihood of factors to capture firms’ turnaround.

Findings: After controlling for firm-level time invariant factors, industry cycles, time-trends, profitability, and leverage, we find that a change in CEO and Chair increases the probability of firm to turnaround by 16% and 54% respectively. Duality reduces the probability of turnaround by 7%. Additional analysis shows that a change in the gender of the CEO do not affect the chances of turnaround. On the other hand, a change of female to male Chair increases the probability of turnaround by 18%. When considering age, a change to younger CEO increases the probability of turnaround by 9% while the effect of change in the age of the Chair do not significantly affect the outcome variable.

 Practical implications: 

The results have practical implications for financially distressed private firms and indicate that changing the CEO and chairperson appears to be the most effective strategy to turn around from the distress situation. This might be due to the fact that new leadership often brings fresh perspectives, which can facilitate the implementation of restructuring measures.