Governance Performance Relationship Research Articles

Relationship between Corporate Governance and Firm Valuation in Nepal

In the context of growing corporate financial scandals and misconduct, the purpose of this study is to examine the relationship between various internal corporate governance measures and corporate valuation (Tobin Q) in Nepal. The study is descriptive and analytical in nature. Causal comparative research design especially multivariate regression models have been used. The method of estimation is Ordinary Least Square (OLS). Board size and independence, CEO duality and existence of audit committee as corporate governance variables and Tobin Q as performance variable for the valuation measure of 54 listed Nepalese firms over the period 2018/19 and 2019/20 have been used in the analysis. Result supports governance performance hypothesis. It shows a significant positive relationship between board size and firm value (Tobin Q). The study establishes the positive impact of CEO duality on firm valuation and concludes that independent directors are unable to play role in value creation. Finally, the role of audit committee is not significant in creating value. These results provide insights on the current regulatory provisions. The findings raise the questions over the role of our expert directors and audit committee. The need of larger board size has been established. Therefore, current regulations with respect to board size and independence; and CEO duality and audit committee need to be reassessed. Though few studies have examined role of corporate governance measures in corporate performance and valuation in Nepalese context, this study is new in its type in investigating the governance performance relationship taking recent dataset of Tobin Q as valuation measure. However, the study is based on limited internal corporate governance variables from a small sample size for only two year’s data set. Hence, generalization should be made cautiously.

Legal protection systems, corporate governance and firm performance: a cross-country comparison

PurposeThis paper builds on the “Law and Finance” theory and aims to examine the effect of the legal and institutional environment on the governance–performance relationship in the context of non-US firms. More precisely, it examines whether and how the country’s legal system and the level of investor protection interact with the firm-level corporate governance and affect firm performance.Design/methodology/approachThe authors used the “G-Index” governance score developed by the Governance Metrics International rating for a sample of 12,728 firm-year observations from 23 countries over the 2009–2016 period.FindingsThe results show that the interaction between the country-level institutions and corporate governance system significantly affect the firm performance. In particular, the findings indicate that firms operating in common law countries tend to exhibit a positive valuation effect and higher performance than firms with a comparable corporate governance level operating in civil law countries. More precisely, the authors find that in common law countries, higher investor protection with enhanced corporate governance is associated with better firm performance. However, firms operating in civil law countries with weaker investor protection and a comparable corporate governance level tend to experience a negative valuation effect.Originality/valueThe findings suggest that the institutional and legal environment is crucial and important in determining the value-maximizing level of good governance practices. Managers and regulators should carefully analyze the cost of these initiatives and should coordinate it with the needs of the country’s legal system. The challenge for the company will be how to adjust its corporate governance strategy according to the needs and demands of the country’s legal system in which the company operates to improve its performance. The regulators should ensure a fit between the specifics of the national legal and institutional environment and corporate governance standards and practices.

Corporate Governance Performance Relationship and the Role of Institutions and Culture: New Evidence from Asian Microfinance Institutions

Purpose: In a globalized world today, Microfinance Institutions (MFIs) are concerned about their corporate governance mechanism to enhance financial and social performance. However, it largely depends on the existing institutional, cultural and economic factors. This paper furthers the debate on the impact of corporate governance on the financial and social performance of Microfinance Institutions (MFIs) in Asian Context.
 Design/Methodology/Approach: The paper utilizes a panel cross-country data set comprised of 183 MFIs in 18 Asian countries over the period of 2010-2018. For empirical analysis, it applies GMM regression technique to control for the endogeniety issue. 
 Findings: The results show that generally corporate governance mechanism contributes more towards social performance of MFIs than the financial performance and a conducive institutional environment enhances both financial and social performance. However, good cultural and economic values contribute only towards the social performance of MFIs.
 Implications/Originality/Value: Since majority of MFIs irrespective of their status are socially oriented. Therefore, good corporate governance mechanism is more effective in enhancing social performance in particular. Progress towards human development contributes to both financial and social performance of MFIs.

Corporate governance and firm performance: empirical evidence from Pakistan

PurposeThe purpose of this research is to look into the governance–performance relationship in the context of critical firm characteristics, such as firm size.Design/methodology/approachBased on total assets, sample firms were classified as small or large. The governance index, which is based on 29 governance provisions covering the audit committee, board committee, ownership and compensation structure of the respective firm, measures governance quality among sample firms. A higher governance index indicates a higher level of governance quality and vice versa. Accounting and market value measures are used to determine firm profitability. The authors used the two-stage least square (2SLS) method of estimation of the model to eliminate the simultaneous equation bias.FindingsCorporate governance (CG) appears to have a positive impact on accounting return and market indices (Tobin’s Q), but it has little impact on return on equity. In terms of firm size, larger companies profited more from better governance implementation than smaller firms that lacked these principles, thus improving CG. The findings indicate that small businesses should improve their governance mechanisms to reap the benefits of CG in terms of increased profitability.Research limitations/implicationsThere are certain drawbacks to this research. First, the authors omitted qualitative aspects of CG from the CG index, such as the board’s decision-making process, directors’ perceptions of the board’s position and directors’ age and qualifications. Such a qualitative component will improve the governance index in the future while building the governance index. Second, as the current study only looks at the nonfinancial sector, caution should be exercised before applying the findings to the entire population.Practical implicationsThe findings show that companies that follow good governance standards have better accounting and market efficiency than those that do not. As a result, good governance practices can help firms in developing countries improve their performance. Academic researchers, regulators, investors, lenders and practitioners can find the findings useful in establishing a true relationship between firm performance and CG practices in Pakistan.Originality/valueThe relationship between governance and profitability in the context of firm size is examined in this research. Firms with varying resources and ability to implement CG codes have varying effects on profitability. To the authors’ knowledge, there was a gap in the literature that addressed this topic in the local context.

The governance role of shareholders and board of directors on firm performance: an eclectic governance-performance model

PurposeThis study aims to examine the governance role of shareholders and board of directors in determining firm performance through an eclectic multi-theoretic model that integrates structure and incentive functions of agency theory and capability aspect of the resource-based view.Design/methodology/approachThe research model uses a large panel data set of 2,364 UK firms over the period 2000–2010 and uses alternative specifications of the model to improve robustness.FindingsThe results show that the industry experience of major shareholders as a proxy for shareholder capability has a significant positive impact on investee firm performance. The findings also reveal that the lock-in effect of the largest shareholder has a positive impact on performance, whereas the monitoring effectiveness of shareholders is not associated with ownership concentration. Moreover, the results indicate the underlying capabilities of the board of directors and their impact on corporate performance – particularly, the interlocking directorates of executives have a positive impact on firm performance but those of non-executives have a negative one. However, the previous directorship experience of non-executives has a positive impact on performance.Research limitations/implicationsThis study presents a more comprehensive and complete understanding of the governance-performance relationship beyond the narrow or partial explanations provided by single-theory-based studies or those of investigating the effect of various governance tools separately.Practical implicationsThis study provides more insights into the capability dimension of shareholders and the role of incentives in motivating shareholders to exercise stronger oversight on the management rather than just using ownership concentration. Hence, the study can serve as valuable guidance for investors, corporate managers and policymakers.Originality/valueTo the best of the knowledge, this is the first comprehensive study that uses an eclectic philosophical approach, integrating the agency theory and resource-based view, to not only examine the impact of board of directors but also investigate the governance role of shareholders in modern corporations to understand how shareholders acquire the requisite skills and information, the best practices and processes, and ultimately use the scarce and inimitable resources that help investee firms in improving their performance.

Microfinance governance: a systematic review and future research directions

PurposeThe purpose of this article is to systematically review extant research on the corporate governance (CG) of microfinance institutions (MFIs) from a global perspective. In the process, it discusses scholarly contributions and highlights key issues from the findings of past studies on several governance attributes, in particular, their interconnections and influence on different institutional outcomes of the sector.Design/methodology/approachAlthough academic work on microfinance governance is substantial, prior studies lack a comprehensive approach to reviewing the literature on this topic. We adopted a systematic method to review past studies on microfinance CG by applying particular inclusion and exclusion criteria. In this regard, the study developed specific questions and sought to find their answers from the existing literature.FindingsThe findings from our research indicate that microfinance governance-performance relationship is the central focus of the majority of our reviewed papers, although a few attempts have been made to explain the interconnection between CG mechanisms at the firm and institutional level. Our findings also show that existing studies have used a variety of techniques to measure MFI performance vis-à-vis their hybrid mission, such as profitability and outreach. Moreover, the study found that common topics discussed in the mainstream literature include board structure, CEO characteristics, audit quality, external governance, disclosure and MFI ownership type.Research limitations/implicationsThis review has some limitations that warrant further research. First, we considered only peer-reviewed scientific publications for our systematic review. Second, we omitted non-English journal papers from our sample. In light of these limitations, we provide some future research directions that may shed further light on our current inquiry.Originality/valueThis paper evaluates past relevant studies using a systematic approach (in preference to the commonly used narrative approach) for a span of over eighteen years; thereby contributing significantly to the sectoral governance literature. This study is novel in that it offers new incentives and opportunities for further research in order to meet the shortcomings of reviewed papers from various theoretical, empirical, methodological and geographical standpoints.

Testing the governance-performance relationship for the Tunisian banks: a GMM in system analysis

RationaleThis study aims to contribute to settling the lack of consensus regarding the determinants of bank performance, not only by considering bank governance, but also by including factors such as CEO compensation and risk management committee. Previous literature has included bank governance and considered only large banks in their surveys. The exclusion of other factors such as small- and medium-size banks may render the findings of these studies limited in applicability.ObjectiveThe objective of this paper is to examine the impact of internal governance on bank performance.MethodologyTo achieve this goal, we used annual data of a sample of ten Tunisian commercial banks listed in the Tunisian Stock Exchange observed during the period 1998–2015. We use the Generalized Method of Moments (GMM) to estimate the parameters of our econometric model.ResultsOur study finds that the correlation between the size of the board of directors, the state’s inclusion, and the presence of independent directors is positive and significant. On the other hand, we have found that CEO compensation, as well as foreign and institutional investors negatively affect the performance of the banks.Conclusions and implicationsTunisian banks are invited to broaden their size through appropriate restructuring, adopt new remuneration policies and define the optimal number of directors representing the state within the board of directors. Our results suggest managerial implications that can be of great value to ensuring the success of Tunisian banks. The latter should favor a higher presence of independent directors to reduce the bank control ineffectiveness caused by having a significant number of foreign and institutional investors in the board of directors.

The relationship between Corporate Governance and Firm Financial Performance: An Empirical Investigation of an emerging market

We investigate whether the distinct nature of multinational firms (MNC) differently influence the governance-performance relationship compared to the local firms in Pakistan. We used a dynamic system GMM estimator that produces consistent and efficient estimation after controlling for dynamic endogeneity and simultaneity. Our results demonstrate that corporate governance (CG) has a significant positive impact on firm financial performance whilst CG practice of MNC firms is more effective than local firms in Pakistan. We observed two distinct financing behaviours, i.e., 'pro-active investment behaviour' of MNC firms and 'conservative investment behaviour' of local firms. We conclude that a well-established corporate culture, significant financial worth and firms' higher growth rate are key determinants of better CG practice.

At the intersection of corporate governance and performance in family business settings: Extant knowledge and future research

AbstractDespite the proliferation of research on governance and performance of family firms over the past decades, the extant empirical evidence remains inconclusive. Acknowledging multiple sources of family firm variation, scholars started explaining the observed differences in governance structures and performance outcomes by taking into consideration the heterogeneity among family firms. In this paper, we undertake a review of the literature at the intersection of governance and performance in family firms to elucidate (a) the role of various governance attributes as performance drivers; and (b) the variability of governance effects across different performance indicators. By taking stock of what is already known and discussing avenues for further investigation, we seek to contribute to a more fine‐grained understanding of the intricate governance–performance relationship in light of the heterogeneous nature of family firms. The key priorities for future inquiry consist in: the identification of missing mediating and moderating variables; the inclusion of currently underexplored governance determinants of family firm performance; and the analysis of complementarity and substitution effects among multiple attributes of monitoring and their changing dynamics over time to secure an optimal governance–performance alignment in family firms.

Corporate governance, firm performance, and business group affiliation: evidence from India

PurposeThe purpose of this paper is to investigate whether, in emerging economies, the relationship between a firm’s corporate governance (CG) and its performance is associated with firm’s affiliation to a business group.Design/methodology/approachA total of 209 publicly listed firms in India during a 10-year period from 2007 to 2016 were studied, and the random effects model was employed for analysis.FindingsEmpirical evidence showed that board size and institutional shareholding positively impacted firm performance, whereas the proportion of independent directors negatively impacted performance. In group-affiliated firms in emerging economies, chief executive officer duality negatively impacted, whereas institutional shareholding positively impacted performance. These results are consistent with the principal–principal agency theory. The study found no discernible impact of proportion of independent directors on firm performance in group-affiliated firms.Originality/valueIn analyzing the governance–performance relationship and its association with business groups, this study extends current understanding by connecting business group research in emerging economies with CG and firm performance research. In examining firms from several industries over a long period of time after controlling for firm size, capital structure and spends on research and development and marketing, the results of this study offer rich empirical evidence that contributes to the extant literature on the nature of the governance–performance relationship.

Effect of board characteristics on firm value: evidence from India

PurposeThe purpose of this paper is to explore the relationship of board characteristics and firm performance for Indian companies.Design/methodology/approachCorporate governance structures of 391 Indian companies out of CNX 500 companies listed on National Stock Exchange have been studied for their impact on performance of companies. Structural equation modeling methodology has been employed on data for five financial years from 2010 to 2014 for selected companies. Market-based measure (Tobin’s Q) and accounting-based measure (return on asset) have been employed for measuring firm performance.FindingsEmpirical findings indicate that there is significant positive association between board size and firm performance. Board independence is found significantly related to firm performance. Number of board meetings is found to be sending positive signal to the market creating firm value. Separation of CEO and chairman of the board is found to be value creating and overburdened directors affect firm performance adversely. Findings also suggest that the governance-performance relationship is also dependent upon the type of performance measures used in the study.Research limitations/implicationsLimitations of this study are in terms of data methodology and possible omission of some variables. It is understood that the qualitative dynamics happening inside board meetings impact corporate performance. The strategic decisions-making process adopted by the boards to fight competition or to increase market share is not available in public domain easily. The decision-making processes and monitoring for implementation of these decisions could impact corporate governance-performance relationship. These parameters and their impact on corporate performance are not covered under the scope of the present study. However, the same could have thrown more light on governance-performance relationship.Originality/valueThe paper adds to the emerging body of literature on corporate governance-performance relationship in the Indian context using a reasonably wider and newer data set.

Board characteristics and firm value for Indian companies

PurposeThis paper aims to explore the relationship between board characteristics and firm performance for Indian companies.Design/methodology/approachCorporate governance structures of 391 Indian companies out of CNX 500 companies listed on National Stock Exchange have been studied for their impact on performance of companies. Panel data regression methodology has been used on data for five financial years from 2010 to 2014 for the selected companies. Performance measures considered are market-based measure (Tobin’s Q) and accounting-based measure (return on asset [ROA]).FindingsThe empirical findings indicate that the market-based measure (Tobin’s Q) is more impacted by corporate governance than the accounting-based measure (ROA). There is a significant positive association between board size and firm performance. Board independence is found significantly related to firm performance. Number of board meetings is found to be sending positive signal to the market creating firm value. Separation of chief executive officer and chairman of the board is found to be value-creating, and overburdened directors affect firm performance adversely.Research limitations/implicationsLimitations of the study are in terms of methodology and possible omission of some variables. It is understood that the qualitative dynamics happening inside board meetings impact corporate performance. The strategic decision-making process adopted by the boards to fight competition or to increase market share is not easily available in public domain. The decision-making processes and monitoring for implementation of those decisions could impact corporate governance performance relationship. These parameters and their impact on corporate performance are not covered under the scope of the present study.Originality/valueThe paper adds to the emerging body of literature on corporate governance performance relationship in the Indian context by using a reasonably wider and newer data set.

Dynamic endogeneity and corporate governance-performance relationship

PurposeThe purpose of this paper is to examine the relationship between corporate governance (CG) and microfinance institution (MFI) performance, using a dynamic panel generalised method of moments (GMM) estimator to mitigate the serious issues with endogeneity.Design/methodology/approachInconsistent findings and a general lack of empirical results for the microfinance industry leave an unclear message regarding the impacts of CG on MFI performance, especially in emerging economies. The authors use GMM estimation techniques to examine whether CG has an influence on MFI performance.FindingsThis study confirms that the MFIs’ contemporaneous performance and CG characteristics are statistically significantly positively linked with their past performance. This study finds statistically significant governance effects on MFI performance, including the presence of international directors and/or donor representatives on the board, client representatives on the board, percentage of non-executive directors and the quality of the national governance system.Practical implicationsThese findings provide some insights for policy-makers and practitioners to develop suitable policies and guidelines to streamline MFIs’ operations in emerging countries. Moreover, national and international investors and donors may use these finding as a benchmark for their investment and funding decisions.Originality/valueThis paper is the first to estimate the CG and performance relationship of MFIs in a dynamic framework by applying the GMM estimation method. This approach improves upon traditional estimation methods by controlling the likely sources of endogeneity. Further, this paper examines whether quality of national-level governance characteristics is related to performance measures of profitability and outreach of MFIs.

Effect of ownership structure and board structure on firm value: evidence from India

PurposeThis paper aims to explore the relationship of promoter ownership and board structure with firm performance for Indian companies.Design/methodology/approachCorporate governance structures of 391 Indian companies out of CRISIL NSE Index (CNX) 500 companies listed on national stock exchange (NSE) have been studied for their impact on performance of companies. Panel data regression methodology has been used on data for five financial years from 2010 to 2014 for the selected companies. Performance measures considered are market-based measure (Tobin’s Q) and accounting-based measure (return on assets [ROA]).FindingsThe empirical findings indicate that market-based measure (Tobin’s Q) is more impacted by corporate governance than accounting-based measure. There is significant positive association between promoter ownership and firm performance. It is also indicated that the relationship between promoter ownership and firm performance is different at different levels of promoter ownership. Board size is found to be positively related to ROA; however, board independence is not found to be related to any of the performance measures.Research limitations/implicationsLimitations of the study are in terms of data methodology and possible omission of some variables. It is felt that endogeneity and reverse causality might be better addressed using simultaneous equation methodology.Originality/valueThe paper adds to the emerging body of literature on corporate governance performance relationship in Indian context using a reasonably wider and newer data set.

The governance-performance relationship: evidence from Ghana

Purpose The purpose of this paper is to investigate the impact corporate governance, measured by a governance index, on the performance of listed firms in a developing economy, Ghana. It also evaluates the effect of the introduction of a code of corporate governance on compliance rates across Ghanaian firms as well as assessing the impact of the code’s introduction on firm performance for the study period 2000-2009. Design/methodology/approach The paper develops a Ghanaian corporate governance index (GCGI) containing 33 provisions to measure corporate governance quality during the pre-code and the post-code sub-periods. The authors use a panel data analytical framework and fixed effects regressions to analyse the governance-performance relationships. Findings After controlling for endogeneity, the authors find a statistically significant and positive relationship between the GCGI and firm performance. The analysis shows evidence of a statistically significant increase in the degree of compliance with the Ghanaian Code from the pre-2003 sub-period to the post-2003 sub-period. The authors also find that the introduction of the code has led to improved firm performance. However, not all elements of corporate governance appear to have a significant effect on firm performance. Research limitations/implications One limitation of this study is the development of a corporate governance index. The binary coding used to construct the GCGI may not reflect the relative importance of the different corporate governance provisions. This means that all elements included in the index are given equal weighting. Future research may assign weights to each of the corporate governance provisions but this may have the disadvantage of making subjective judgements relative to the importance of each corporate governance provision recommended by the Ghanaian Code. Practical implications These results have important implications for both policy makers and companies. For policy makers, it is encouraging for the development of a code of corporate governance to regulate firms rather than enforcing rigid laws that may not be value relevant. For companies, the improvement in compliance with a code of corporate governance can provide a means of achieving improved performance. Originality/value This paper adds to the limited evidence on the governance-performance relationship in developing economies and in particular it analyses the role of a governance index. It is also the first paper to compare the pre- and the post-code governance index-performance relationship in an African or developing country.

Ownership concentration and corporate performance from a dynamic perspective: Does national governance quality matter?

In this paper, the relationship between ownership concentration and financial performance of companies in Singapore and Vietnam is investigated in a dynamic framework. By focusing on two different types of national governance systems (well-developed vs. under-developed), we observe how the relationship is moderated by the national governance quality. We find that the performance effect of concentrated ownership persists in these markets even after the dynamic nature of the ownership concentration–performance relationship is taken into consideration. Our finding supports the prediction of agency theory about the efficient monitoring effect of large shareholders in markets with highly concentrated ownership. In addition, we find that national governance quality does matter when explaining the ownership concentration–performance relationship. The positive effect of concentrated ownership on performance of firms operating in the under-developed national governance system (Vietnam) tends to be stronger than that in the well-established system (Singapore). This finding is consistent with the argument that ownership concentration is an efficient corporate governance mechanism which can substitute for weak national governance quality. Econometrically, our findings still hold even after controlling for dynamic endogeneity, simultaneity, and unobserved time-invariant heterogeneity, inherent in the corporate governance–performance relationship.

Ownership concentration, board characteristics and firm performance

Purpose– The purpose of this paper is to advance the understanding of the relationship between firm-level governance mechanisms and firm performance using a contingency framework. The contingency framework is based on an integration of agency theory, stewardship theory, resource dependence theory and stakeholder theory of firm governance.Design/methodology/approach– The authors test the arguments on a sample of all the listed firms on the New Zealand Stock Exchange between 2004 and 2007. Given the longitudinal nature of the data, the authors employ random effects, generalized least square estimation to run the regression models.Findings– The authors find that the presence of internal directors, CEO duality, board size and presence of professional directors leads to superior firm performance. A lack of ownership concentration leads to agency problems resulting in inferior performance. However, the positive effect of board independence on firm performance reduces in firms that have a high-ownership concentration. Additionally, a high-ownership concentration attenuates the positive effects of board size and board competence.Originality/value– This study helps reconcile some of the conflicting findings on firm governance-performance relationship. As the findings suggest, the effectiveness of a particular governance mechanism (such as board members) may depend on the presence or absence of another governance mechanism (such as ownership concentration). The integrative, multi-theoretic model that the authors propose in this paper is a unique contribution to the governance literature.

Governance practices and firm performance: Does shareholders’ proximity to management matter?

This article investigates the link between corporate governance practices and firm performance, a topic that received a lot of attention by regulators, interest groups and academics. Research in this field has recently shifted from the analysis of one or more specific governance provisions to the analysis of multiple aspects of corporate governance. In fact, most studies now use corporate governance indexes that capture a wide range of corporate governance provisions (index-based studies). The objective and main contribution of this article is to revisit the governance–performance relationship while taking into account shareholders’ proximity to the locus of management. Shareholders’ proximity is defined based on ownership concentration and whether or not the dominant/controlling shareholder holds top executive positions in the firm. The lowest level of proximity is evidenced in firms with dispersed ownership, the highest level in controlled entities where the controlling shareholder holds the CEO and/or Chair positions. Governance is measured on a global scale using the Report on Business (ROB) index. The study is conducted over a 4-year period (2002–2005) using panel regressions in a two-stage least squares framework on a sample of Canadian publicly traded companies (470 firm-year observations). The results of the study show a positive relationship between the ROB global index (and sub-indexes) and Tobin’s Q whether ownership is dispersed or is concentrated in the hands of a dominant or controlling shareholder. Shareholders’ proximity to management has no impact on the governance–performance relationship. Overall, the results support a one-size-fits-all approach to governance, a policy adhesion that underlined the widespread adoption of Codes of Good Governance and legal/regulatory changes in the years following Enron’s collapse in the United States. Initiatives were in large part supported by a general consensus toward a stock market-centered model of governance. However, with the recent debt crisis in the United States, public perception has changed. The credibility of such a model for governing our institutions is called into question. Our study tempers these concerns by showing that governance controls should not account for ownership differences in the context of publicly traded companies. Instead, good governance practices based on an independent board of directors that promotes transparency and protects shareholders’ rights should be prioritized whether or not ownership is dispersed or concentrated. From a corporate governance standpoint, this study sheds new light on controlled companies. Our results show that improving transparency and control adds value to all publicly traded companies including those with concentrated ownership. Moreover, if holding the CEO and/or Chair positions has the potential to increase the power of a dominant/controlling shareholder, it does not seem to translate into higher agency costs to the firm, nor does the presence of insiders seems to affect the effectiveness of the controls in place. Publicly traded companies may therefore welcome dominant/controlling shareholders in key management positions without compromising on firm performance and value. In any case, putting in place good governance practices seems essential to ensure that managers/shareholders are kept in check and work in the best interests of their company.

Does a country’s financial and legal systems contemporaneously impact the governance and performance relationship: Further evidence?

We investigate the impact of continuous measures of the financial system and investor protection on the corporate governance-performance relationship. We find that shareholder suits rights/stock market capitalization (disclosure rights/stock market capitalization) has monotonic (non-monotonic) relation with firm performance and that high-levels of stock market capitalization and investor protection generate valuation synergies. Besides interactions of financial and legal systems with corporate governance, market- (bank-) orientation and development and stronger (weaker) investor protection along with better (worse) corporate governance are associated with higher (lower) valuations. A country’s migration to a developed stock market with enhanced investor protection is related to better corporate governance and firm performance.

Governance–Performance Relationship: A Re‐examination Using Technical Efficiency Measures

The objective of this study is to analyse further the governance–performance relationship while improving on two methodological issues: control for endogeneity and firm performance measurement. To mitigate the endogeneity problem, we first focus on subsamples of firms for which we ex ante expect better corporate governance to cause better performance. Second, we use generalized least squares regressions for panel data. To control for potential measurement bias, we measure firm performance using data envelopment analysis (DEA). The research is conducted in Canada over a five‐year period from 2001 to 2005. Corporate governance is measured based on the Report on Business corporate governance index published by the Globe and Mail. Overall, the results show that better governed firms are more efficient. This study is in line with a growing number of recent studies that propose alternative measures of firm performance. By using DEA, this study brings together the corporate finance and productivity literature.