The Relationship between Corporate Governance Mechanism and the Firm Value: The Case of Islamic Banks in Malaysia and Indonesia

Abstract

Our study empirically examines the relationship between corporate governance mechanism and their interactions on the firm value. We concentrated on the banking industry in Indonesia and Malaysia given that majority of the literature are primarily focused on the non-financial industry due to stringent regulation on disclosure in the financial banking counterparts. We measure firm’s value using Tobin’s q, while corporate governance mechanisms comprised of independent directors, the presence of audit committee, the institutional ownership as well as the percentage of female directors on the board. Using 48 observations during the year 2016-2018, our result exhibit that there is a significant positive association between audit committee independence and firm value. Moreover, we also reported a negative link between board independent and the presence of female directors on the firm value. In respect to our interaction effects, we found that there is a complementary relationship between (i) audit committee independent and board independent and (ii) female directors and audit committee independent and firm value. Moreover, our regression also reported a significant substitutive relationship between (i) female directors and institutional ownership (ii) female directors and board independent as well as (iii) audit committee independent and institutional ownership and firm value. In contrary to the findings from the western counterpart, our result shows that the presence of female directors reduce firm value, thus suggesting that the role of female directors have been impaired due to the cultural aspect of the society.