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Corporate Governance and Firm Performance PDF

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Corporate Governance and Firm Performance
1
RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND FIRM PERFORMANCE
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Corporate Governance and Firm Performance
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Relationship between Corporate Governance and Firm Performance
Abstract
Proper corporate governance is considered to solidify investors' trust, enhance firm
performance, and create goodwill for the business entity. On the other hand, poor corporate
governance is concerned to erode investor confidence due to substandard company performance.
The main aim of this research study is to explore the relationship between corporate governance
and firm performance. The objective under this study therefore is to assess which are the best
areas of corporate governance to concentrate on if a company wants to realize considerable
improvements in firm performance over a given timeframe. Firm performance and corporate
governance data was collected from seventy six FTSE 100 non-financial companies for the
period between 2009 and 2016. The greatest limitation encourage is the lack of a significant
proportion of data in the case of all nine variables. A hypothesis was formulated with regard to
the relationship between the two parameters and they were tested using regression and
correlation analysis.
The analysis results revealed that there is a considerable correlation and linear
relationship between the independent variables (corporate governances) and the dependent
variable (firm performance). Two regression analyses were performed with two different
dependent variables (ROA and Tobin's Q) but with the same seven independent variables. The
purpose of conducting two different regression analyses is centered on finding the model that
best fits the data provided. The findings of this research project are in-line with previous research
studies under which a positive relationship between corporate governance and firm performance
was discovered. It is however, important to indicate that the relationship between the two
assessment parameters is not considerably strongly indicating diminished influence on each
Corporate Governance and Firm Performance
3
other. Therefore, positive changes made to corporate governance will only very small changes to
firm performance. As such, firms cannot dependent completely on the betterment of corporate
governance on their incentive to improve firm performance; additional solutions should be
explored e.g. Training programs for staff, and purchase of new firm machinery.
Key Words
ROA: Return on Assets
Tobin's Q: Measure of Firm Performance
Corporate Governance
Firm Performance
Corporate Governance and Firm Performance
4
Introduction
Corporate governance relates to the various processes and frameworks put in place to aid
in the management and leadership of a given firm/business entity. Corporate governance is
dependent on the formal association among stakeholders, shareholders, company board of
directors, and other controlling parties[ CITATION Esr15 \l 1033 ].There exists a direct
connection between corporate governance and costs control in an organization; as such, effective
cost control techniques can result in better firm performance based on profitability and liquidity
measures. Firms that are interested in attracting investment opportunities are required to have a
management team that has a firm understanding of IRR and portfolio management. As a result,
proper corporate governance will result in increased investor confidence and encourage people to
take up company shares or stocks. Good corporate governance is supposed to elevate firm
performance and build employee morale[ CITATION Mah17 \l 1033 ].
Effective corporate governance is supposed to create a balance between the majority and
minority interests of shareholders. In addition, it is supposed to regulate the powers of the
company directors to ensure they are answerable to firm stakeholders yet powerful enough to
challenge poor decisions made by shareholders. Moreover, corporate governance has to properly
cater to the rights of employees, and creditors. A broader definition of corporate governance
summarizes the information presented above. Corporate governance is also used to refer to a
system of people, processes, and policies that are dedicated to the fulfillment of stakeholders' and
shareholders' needs by employing proper management techniques that demonstrate integrity,
responsibility, accountability, and futuristic-thinking. According to a review by the Washington
Post, corporate governance has become one of the most talked about areas, when it comes to the
management of firm performance[ CITATION Mwa13 \l 1033 ].
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