Corporate‐Governance Ratings and Company Performance: A Cross‐European Study

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: Prior studies have failed to unequivocally establish a positive relationship between corporategovernance ratings and company performance, although theoretically, we would expect to find one. In this paper, we try to establish whether a positive relationship exists through modeling the relationship more carefully. Research Findings/Insights: After controlling for selection bias and endogeneity simultaneously, we find a significant positive relationship between corporate-governance ratings and performance. However, the strength of this relationship seems to depend on the quality of the institutional environment. Finally, we find that improvements in corporate-governance ratings over time result in decreasing marginal benefits in terms of performance. Theoretical/Academic Implications: Our paper contributes to the literature by showing that improved corporategovernance ratings lead to better performance, but that econometric problems might obscure this relationship. We also show that for a sample of developed countries the institutional environment affects the relationship between governance ratings and performance. Finally, this paper contributes to the literature on the impact, regarding compliance and effectiveness, of codes of good governance. Practitioner/Policy Implications: Our results are relevant for both companies and policy makers. They indicate that companies can improve performance by adhering to good corporate-governance practices. For policy makers, the findings suggest that soft laws and the invisible hand of the market lead to companies improving their corporate governance.

Training and Development Policy, Corporate Governance, and Firm Performance

“…The estimated coefficient values are 0.4648 for Tobin's Q and 0.4760 for ROA. This is in line with prior research in Russia, such as that undertaken by Black (2001), Klapper and Love (2004), Renders et al (2010) and Estrin and Prevezer (2011). In the Indian context, it also found a significant contribution by corporate governance on firm performance, where the values are 0.3146 and 0.2323 for Tobin's Q model and ROA model, respectively.…”

Corporate governance and company performance across Sub-Saharan African countries

“…Good corporate governance practice suggests that a company should elect directors with the right qualifications and skills to develop the company's strategy and help it to adapt to present and future challenges (Financial Reporting Council, 2010, Hilb, 2011, Parum, 2005. Also, a company should disclose the remuneration paid to its directors and executives (Garay and González, 2008, OECD, 2004, Renders et al, 2010, information about the company's ownership (OECD, 2004, Renders et al, 2010, and the company's commitment to effective corporate governance (Klapper andLove, 2004, Renders et al, 2010). It is important that companies provide adequate information to demonstrate that all of these issues are being addressed.…”

“…Company discloses academic qualifications of its senior officers 20 Company discloses remuneration of senior management team (Renders et al, 2010, OECD, 2004 21 Company discloses work/professional qualifications of directors (Black et al, 2006b) 22 Company discloses academic qualifications of directors (Black et al, 2006b) 23…”

“…Company uses IFRS (Garay andGonzález, 2008, Klapper andLove, 2004) 14 Company discloses composition of remuneration committee (Renders et al, 2010) 15 Company discloses composition of audit committee (Renders et al, 2010) 16 Company discloses total remuneration paid to each director (OECD, 2004, Garay andGonzález, 2008) 17 Company discloses remuneration of CEO (Renders et al, 2010, Garay and González, 2008, OECD, 2004 18 Company discloses work/professional qualifications of its senior officers…”

“…Company discloses date on which each director was appointed 25 Company uses a "big four" audit firm as its external auditor (Azizkhani et al, 2010) 26 Company releases its annual reports within 3 months of year-end (Renders et al, 2010) 27 Company reports stock prices and stock market performance (Renders et al, 2010) 28 Company discloses share ownership details (Renders et al, 2010, OECD, 2004 29 Company states its commitment to effective corporate governance (Renders et al, 2010, Klapper andLove, 2004) 30 Company discloses a commentary on its financial results (South Africa IOD, 2009) …”