Internal and External Governance Mechanisms: Their Impact on the Performance of Large UK Public Companies

Abstract

This paper analyses the relationship between internal and external corporate governance mechanisms and the performance of UK companies within the context of the Cadbury Committee's Code of Best Practice. The results show, first, that the market for corporate control is an effective governance mechanism that may be regarded as a substitute for the other mechanisms.Second, there is a weak relationship between the internal governance mechanisms and performance. Third, there is also little evidence that with firms in the top and bottom performance deciles have different internal governance characteristics. The results therefore raise questions about the efficacy of imposing prescriptive internal governance mechanisms on companies, particularly given that the market for corporate control has been shown to be an effective means of reducing agency costs.

Effect of Board Diversity on Corporate Governance Structure and Operating Performance: Evidence from the UK Listed Firms

“…Similar result was found in the study of Kallamu and Saat (2015) on data from listed finance firms in Malaysia. However, with UK data, Vafeas and Theodorou (1998) and Weir et al (2002) found no evidence to support the relationship between audit committee and performance. Similarly, using data on Jordanian firms, Hamdan, Sarea and Reyad (2013) reported that audit committee has no effect on operating performance.…”

“…In the UK, Weir, Laing and McKnight (2002) using data on 311 firms for 1996, reported that proportion of independent outside directors is positively and significantly related to performance. However, the authors did control other endogenous factors that may have effect on performance in the analysis and besides, they used single period time lag (1996).…”

Environmental and social disclosures: Link with corporate financial performance

“…Having estimated r e , Equation (4) allows us to solve for the long run growth rate (g) that is implied by the share price (p t ) by using analysts' earnings forecasts, the forecasted book values estimated using the clean surplus relation, and the estimated cost of equity capital (r e ) . Once we estimate the growth rates, we analyse the impact of E/S/ES disclosure scores on the long run implied growth rates by a regression of the growth rate g on the E/S/ES scores and control variables including E/S/ES performance score, profitability (ROA), a proxy for firm size (Weir, Lang & McKnight, 2002;Lo & Sheu, 2007), leverage (Weir et al, 2002), R&D expenditure, and indicator variables for industry membership. As in previous analysis, we again check for potential collinearity between disclosure and performance scores, using variance inflation factors, and find it not to be a problem.…”

Do Board Characteristics Matter to Insider Timing and Profitability in the US Market?

“…Capital structure theory argues that debt financing helps to manage the free cash flows available to the manager [41,42]. The introduction of debt into the capital structure imposes a compulsory obligation on managers and limits the financial resources particularly cash flow, which may be spent on personal managerial needs.…”