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

ABSTRACT 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.