Abstract
This paper uses technical efficiency to measure the performance impact of internal corporate governancemechanisms. Specifically, it analyzes how the size, leadership and composition of the board of directors togetherwith external shareholders can be structured to enhance a firm’s technical efficiency. The study utilizes anunbalanced pool of manufacturing firms in sixteen countries and offers support that active large externalshareholders’ who commit credible signals to minority investors of firms that have an insider-dominated orbalanced small board with a unified leadership can lead to enhanced technical efficiency. The results alsoprovide evidence of the convergence of American and European corporate governance practices. Externalshareholders are also encouraged to elect an outsider-dominated board when insiders underperform, and not onblind normative advice.
Highlights
Corporate governance has been defined by Denis and McConnell (2003) as a set of mechanisms that induces the self-interested managers of a company to make decisions that maximize the performance of the company to its shareholders
The study utilizes an unbalanced pool of manufacturing firms in sixteen countries and offers support that active large external shareholders’ who commit credible signals to minority investors of firms that have an insider-dominated or balanced small board with a unified leadership can lead to enhanced technical efficiency
There has been an increasing interest in determining the effect of CG using a performance measure directly linked to the production process as the core of a business organization is its efficient operation of resources to achieve optimal outputs. This performance measure known as technical efficiency is the situation where, given an existing technology, a firm cannot produce a larger output from the same inputs or the same output with less of one or more inputs without increasing the amount of other inputs
Summary
Corporate governance (hereafter denoted as CG) has been defined by Denis and McConnell (2003) as a set of mechanisms that induces the self-interested managers of a company to make decisions that maximize the performance of the company to its shareholders It deals with the limits of residual control rights of management’s discretional decision making (Shleifer & Vishny, 1997), and Jensen (1993) includes such internal mechanisms as executive compensation, internal control procedures and auditing, board of directors’ responsibilities, and the structure of ownership (concentration and voting rights). Applying frontier efficiency captures the evaluation of inventories and depreciation in the short term than with financial ratios (Pi & Timme, 1993; Sheu & Yang, 2005) Another usefulness of TE is international data analysis where the equity markets across countries are different; for example the equity markets in Belgium, Greece, Italy and Spain are thin and less efficient compared to that of the United States. TE makes it possible to predict the impact of CG mechanisms on performance
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