Do corporate governance structure and capital structure matter for the performance of the firms? An empirical testing with the contemplation of outliers.

Wang PeiZhi,Muhammad Ramzan,Stefan Cristian Gherghina

doi:10.1371/journal.pone.0229157

Wang PeiZhi, Muhammad Ramzan + Show 1 more

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https://doi.org/10.1371/journal.pone.0229157

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Journal: PloS one	Publication Date: Feb 27, 2020
Citations: 25	License type: CC BY 4.0

Affiliation: Shandong University of Finance and Economics

Abstract

A superlative combination of the Board of Directors (BOD) with diverse members is considered a sign of a good governance structure. Meanwhile, the key decision taken by BOD to make organizations profitable is the capital structure with the optimal mix of debt and equity. Unfortunately, previous literature has reported this relationship with a mixed trend, which may be due to research gaps in the statistical analysis. Moreover, it also shows that the relationship between them has not yet been fully predicted and can still be completely understood. This study contains time-variant and time-invariant variables, and these variables usually have an outlier’s problem. As we know that the OLS estimators are more sensitive to react adversely to this problem, yet we have not received enough evidence from similar researches that cares about it. Consistent with these arguments, this study focuses primarily on exploring the influence of corporate governance structure and the capital structure on firms' market-oriented and accounting-based performance, especially with the contemplation of outliers. Hypotheses have been evaluated using M-estimators and S-estimators of robust regression for 45 listed firms for the period from 2013 to 2017. The findings reveal that the governance structure of firms with BOD, independent director, institutional investors, audit committee and female directors accelerates its performance. Further, we find that the leverage ratio improves accounting performance, but it has a downward impact on the share prices of listed firms. Our study contributes to the prevailing literature by proving that the kind of governance structure that based on diverse expert members and a capital structure with a high volume of debt is of utmost importance to the performance of firms as a whole.

Highlights

Corporate governance is a system that used to compose the best mix of the board members while governing and managing the firms properly and profitably
In the case of return on assets (ROA), the results show that Board of Directors (BOD) and institutional investors have a positive relationship with ROA at 1% and 10% significance levels, respectively
The results indicate that BOD, female directors, institutional investors, and financial leverage has a positive association with ROA at 1%, 5%, 10%, and 5% levels

Summary

Introduction

Corporate governance is a system that used to compose the best mix of the board members while governing and managing the firms properly and profitably. It considers as vital for developing countries as these nations are able to achieve a Corporate governance and capital structure impact on firms performance: Testing with contemplation of outliers high level of economic growth, stimulate savings, and build a credible economy through better management of industries It is important in an organization to raise the rate of investment and protecting the rights of minority stakeholders [47]. They were focusing on two important issues of corporate governance—first, how a company’s leadership structure can influence corporate governance and second, how the formation of a board of directors can impact sustainable performance They used OLS, fixed effect, random effect, and GMM models as an econometric tool, and the results of these studies are contrary. The panel data increases the degree of freedom and efficiency of the econometric models and helps to control the unobserved heterogeneity between the cross-sections [100]

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Findings

Conclusions and practical implications