The effect of corporate governance and divergence between cash flow and control rights on firm performance: Evidence from Malaysia

Abstract

Nowadays, separation of ownership from control in business causes the inability of shareholders to have a full control over managerial actions. In this situation, agency theory assumes an opportunistic behavior, that is, individuals want to maximize their own expected interests and are resourceful in doing so. This opportunistic behavior leads to conflict of interest between managers and shareholders on the one hand, and majority and minority shareholders on the other. From the agency theory perspective, the aim of Corporate Governance (CG) is to mitigate these agency conflicts and direct the operations to achieve an appropriate performance. Therefore, the aim of this study is to examine the relationship between CG characteristics and firm performance in Malaysian listed firms where divergence between cash flow and control rights is critical. Based on a randomly selected sample of 400 companies listed on Bursa Malaysia and applying the linear multiple regression, it is found that board independency and CEO duality have respectively positive and negative relationship with firm performance. In addition, audit quality has a significantly positive relationship with firm performance. The contribution of this study is to add a dummy interaction between audit quality and divergence between cash flow and control rights. It is found that high-quality audit firms can mitigate the agency problems in firms with divergence between cash flow and control rights.