The Effect of Corporate Governance on Financial Performance: Evidence From a Shareholder-Oriented System

Document Type : Research Paper

Authors

1 Accounting Department, University of Sulaimani, Sulaimani, Kurdistan, Iraq

2 Head of Banking and Finance Department, Near East University, Nicosia, North Cyprus, Turkey

Abstract

Despite the vast literature, the relationship between corporate governance and firm performance is hotly debated in the research field of corporate finance. This study examined the effect of Corporate Governance (GC) on the performance of firms in non-financial sectors listed on the Frankfort Stock Exchange in Germany over the period 2002-2018. To this end, we measured firm performance based on accounting data, using ROA and ROE. The results provided evidence that the characteristics of the audit committee and board of directors have significant and negative effects on firm financial performance, whereas the effect of CEO duality is not statistically significant. Large board size could bring about the issue of deferred decision making by the board members in the insider-controlled CG system of Germany. Furthermore, IFRS adoption in 2005 was found to have a positive effect on firm performance. These results can raise considerable interest in managers and shareholders, precisely when they prioritize the financial performance of their companies.

Keywords

Main Subjects

References

Abdallah, M. B., & Bahloul, S. (2021). Disclosure, Shariah governance and financial performance in Islamic banks. Asian Journal of Economics and Banking, 5(3), 234-254.
Abdullah, H. (2013). An analysis of the value relevance of accounting information within the U.K. after the adoption of International Financial Reporting Standards [Master’s thesis]. University of Leicester.
Abdullah, H. (2020). Capital structure, corporate governance and firm performance under IFRS implementation in Germany [unpublished PhD dissertation]. Near East University.
Abdullah, H., Faraj, S. A., & Narmen, A. (2016). The costs of social responsibility and its impact on the reduction of environmental risks. AL-Anbar University Journal of Economic and Administration Sciences, 8(16), 43-486.
Abdullah, H., Rasul, R., & Isiksal, A. (2020). Dividend policy and firm value under the IFRS adoption era: A case of Borsa Istanbul. Journal of Financial Reporting and Accounting, working paper.
Abdullah, H., & Tursoy, T. (2019). Capital structure and firm performance: Evidence of Germany under IFRS adoption. Review of Managerial Science, 15(2), 379–398.
Abdullah, H., & Tursoy, T. (2021). Capital structure and firm performance: A panel causality test (No. 105871). University Library of Munich, Germany. Retrieved from [https://mpra.ub.uni-muenchen.de/105871/].
Abdullah, H. A., Awrahman, H. G., & Omer, H. A. (2021). Effect of working capital management on the financial performance of banks: An empirical analysis for banks listed on the Iraq stock exchange. Qalaai Zanist Scientific Journal, 6(1), 429-456.  https://doi.org/10.25212/lfu.qzj.6.1.17
Afriyie, E. Y., Aidoo, G. K. A., & Agboga, R. S. (2021). Corporate governance and its impact on financial performance of commercial banks in Ghana. Journal of Southwest Jiaotong University, 56(4), 58-69.
Ahmed, A. M., & Muhammed, A. A. (2018). Internal control systems & its relationships with the financial performance in telecommunication companies―A case study of Asiacell. International Journal of Scientific and Technology Research, 7(11), 82-88.
Akalpler, E., & Abdullah, H. (2020). The impact of IFRS adoption as control variable on the stock market-growth nexus: Model countries Germany and Poland. International CEO & Social Sciences Congress (paper presentation) , 143-167.
Aldamen, H., Duncan, K., Kelly, S., McNamara, R., & Nagel, S. (2012). Audit committee characteristics and firm performance during the global financial crisis. Accounting & Finance, 52(4), 971-1000.
Bandyopadhyay, A., & Barua, N. M. (2016). Factors determining capital structure and corporate performance in India: Studying the business cycle effects. The Quarterly Review of Economics and Finance, 61, 160-172.
Bathula, H. (2008). Board characteristics and firm performance: Evidence from New Zealand [unpublished PhD dissertation]. Auckland University of Technology.
Bauer, R., Guenster, N., & Otten, R. (2004). Empirical evidence on corporate governance in Europe: The effect on stock returns, firm value and performance. Journal of Asset Management, 5(2), 91-104.
Becker, B., & Stromberg, P. (2012). Fiduciary duties and equity-debtholder conflicts. The Review of Financial Studies, 25(6), 1931-1969.
Beiner, S., Drobetz, W., Schmid, M. M., & Zimmermann, H. (2006). An integrated framework of corporate governance and firm valuation. European Financial Management, 12(2), 249-283.
Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of Corporate Finance, 14(3), 257-273.
Bhagat, S., & Bolton, B. (2019). Corporate governance and firm performance: The sequel. Journal of Corporate Finance, 58, 142-168.
Brahmana, R. K., Brahmana, R. K. M., & Ho, T. C. F. (2018). Training and development policy, corporate governance, and firm performance. Gadjah Mada International Journal of Business, 20(1), 59-87.
Breusch, T. S., & Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239-253.
Bryman, A., & Bell, E. (2015). Business research methods (4th vol.). Bell & Bain Ltd.
Budur, T., & Poturak, M. (2021). Employee performance and customer loyalty: Mediation effect of customer satisfaction. Middle East Journal of Management, 8(5), 453-474.
Chadha, S., & Sharma, A. K. (2015). Determinants of capital structure: An empirical evaluation from India. Journal of Advances in Management Research, 12(1), 3-14.
Chijoke-Mgbame, A. M., Mgbame, C. O., Akintoye, S., & Ohalehi, P. (2019). The role of corporate governance on CSR disclosure and firm performance in a voluntary environment. Corporate Governance: The International Journal of Business in Society, 20(2), 294-306.
Clarke, T. (1998). The contribution of non‐executive directors to the effectiveness of corporate governance. Career Development International, 3(3), 118-124.
Dalwai, T., Mohammadi, S. S., Chugh, G., & Salehi, M. (2021). Does intellectual capital and corporate governance have an impact on annual report readability? Evidence from an emerging market. International Journal of Emerging Markets, (ahead of print) https://doi.org/10.1108/IJOEM-08-2020-0965
Dang A, R., Houanti, L., Le, N. T., & Vu, M. C. (2018). Does corporate governance influence firm performance? Quantile regression evidence from a transactional economy. Applied Economics Letters, 25(14), 984-988.
Detthamrong, U., Chancharat, N., & Vithessonthi, C. (2017). Corporate governance, capital structure and firm performance: Evidence from Thailand. Research in International Business and Finance, 42, 689-709.
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427-431.
Donaldson, L. (2008). Ethics problems and problems with ethics: Toward a pro-management theory. Journal of Business Ethics, 78(3), 299-311.
Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of Management, 16(1), 49-64.
Drobetz, W., Schillhofer, A., & Zimmermann, H. (2004). Corporate governance and expected stock returns: Evidence from Germany. European Financial Management, 10(2), 267-293.
Enache, L., & Hussainey, K. (2020). The substitutive relation between voluntary disclosure and corporate governance in their effects on firm performance. Review of Quantitative Finance and Accounting, 54(2), 413-445.
Enders, W. (2008). Applied econometric time series. John Wiley & Sons.
Faysal, S., Salehi, M., & Moradi, M. (2020). The impact of ownership structure on the cost of equity in emerging markets. Management Research Review, 43(10), 1221-1239. https://doi.org/10.1108/MRR-11-2019-0475  
Faysal, S., Salehi, M., & Moradi, M. (2021). Impact of corporate governance mechanisms on the cost of equity capital in emerging markets. Journal of Public Affairs, 21(2), e2166. https://doi.org/10.1002/pa.2166
Fosu, S. (2013). Capital structure, product market competition and firm performance: Evidence from South Africa. The Quarterly Review of Economics and Finance, 53(2), 140-151.
Franks, J., & Mayer, C. (1994). Corporate control: A comparison of insider and outsider systems. London Business School.
Gerum, E., Molls, S. H., & Shen, C. (2018). Corporate governance, capital market orientation and firm performance: Empirical evidence for large publicly traded German corporations. Journal of Business Economics, 88(2), 203-252.
Giroud, X., & Mueller, H. M. (2010). Does corporate governance matter in competitive industries? Journal of Financial Economics, 95(3), 312-331.
Goergen, M., Manjon, M. C., & Renneboog, L. (2008). Is the German system of corporate governance converging towards the Anglo-American model? Journal of Management & Governance, 12(1), 37-71.
Gujarati, D. N. (2009). Basic econometrics. Tata McGraw-Hill Education.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society, 46(6), 1251-1271.
Ibhagui, O. W., & Olokoyo, F. O. (2018). Leverage and firm performance: New evidence on the role of firm size. The North American Journal of Economics and Finance, 45, 57-82.
International Finance Corporation (2020). Corporate governance; overview. https://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/IFC+CG.
Jaisinghani, D., & Kanjilal, K. (2017). Non-linear dynamics of size, capital structure and profitability: Empirical evidence from Indian manufacturing sector. Asia Pacific Management Review, 22(3), 159-165.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.
Jensen, M., & Meckling, W. (1976). Theory of the firm: Management behavior, agency costs and capital structure. Journal of Financial Economics, 3(4), 305-60.
Jouida, S. (2018). Diversification, capital structure and profitability: A panel VAR approach. Research in International Business and Finance, 45, 243-256.
Khongmalai, O., & Distanont, A. (2017). Corporate governance model in Thai state-owned enterprises: structural equation modelling approach. Corporate Governance: The International Journal of Business in Society, 17(4), 613-628.
Kiptoo, I. K., Kariuki, S. N., & Ocharo, K. N. (2021). Corporate governance and financial performance of insurance firms in Kenya. Cogent Business & Management, 8(1), 1938350.
Ko, C., Lee, P., & Anandarajan, A. (2019). The impact of operational risk incidents and moderating influence of corporate governance on credit risk and firm performance. International Journal of Accounting & Information Management, 27(1), 96-110.
Kohlmann, P. (2014). The implementation of corporate governance in Germany and Brazil: A comparative case study [unpublished Master’s thesis]. Fundação Getulio Vargas’s Sao Paulo School of Business Administration (FGV EAESP).
Kreijger, G. (2018). Why German corporate governance is so different? Handelsblatt Global.
Kyere, M., & Ausloos, M. (2021). Corporate governance and firms financial performance in the United Kingdom. International Journal of Finance & Economics, 26(2), 1871-1885.
Lan, L. L., & Heracleous, L. (2010). Rethinking agency theory: The view from law. Academy of Management Review, 35(2), 294-314.
Le, T. P. V., & Phan, T. B. N. (2017). Capital structure and firm performance: Empirical evidence from a small transition country. Research in International Business and Finance, 42, 710-726.
Levin, A., Lin, C. F., & Chu, C. S. J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.
Levinthal, D. A., & Wu, B. (2010). Opportunity costs and non‐scale free capabilities: Profit maximisation, corporate scope, and profit margins. Strategic Management Journal, 31(7), 780-801.
Li, K., Niskanen, J., & Niskanen, M. (2019). Capital structure and firm performance in European SMEs. Managerial Finance, 45(5), 582-601.
Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), 1785-1824.
Mak, Y. T., & Kusnadi, Y. (2005). Size really matters: Further evidence on the negative relationship between board size and firm value. Pacific-Basin Finance Journal, 13(3), 301-318.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of Banking & Finance, 34(3), 621-632.
Maurovic, L., & Hasic, T. (2013). Reducing agency costs by selecting an appropriate system of corporate governance. Economic research-Ekonomska Istraživanja, The 6th international conference, the changing economic landscape: issues, implications and policy options (paper presentation), 225-242.
Mohammed, A. A., Khzer, K. A., & Abdullah, H. A. (2019). Challenges facing accounting education in the Kurdistan Region universities: A survey study. Koya University Journal of Humanities and Social Sciences, 2(1), 109-117. https://doi.org/10.14500/kujhss.v2n1y2019.pp109-117.
Ozcan, İ. Ç. (2019). Capital structure and firm performance. European Journal of Transport and Infrastructure Research, 19(3), 177-195. https://doi.org/10.18757/ejtir.2019.19.3.4384
Rashid, K., & Islam, S. M. (2014). Corporate governance, firm performance and complementarities in a developed market: A study of the Australian case for the period 2000–2003. International Journal of Disclosure and Governance, 11(3), 255-283.
Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of corporate finance. Tata McGraw-Hill Education.
Salehi, M., & Moghadam, S. M. (2019). The relationship between management characteristics and firm performance. Competitiveness Review: An International Business Journal, 29(4), 440-461.
Sampaio, J., Gallucci, H., Silva, V. A. B., & Schiozer, R. F. (2020). Mandatory IFRS adoption, corporate governance, and firm value. RAE-Revista de Administração de Empresas, 60(4), 284-298.
Saunders, M. N. (2011). Research methods for business students (5th ed.). Pearson Education India.
Saygili, A. T., Saygili, E., & Taran, A. (2021). The effects of corporate governance practices on firm-level financial performance: Evidence from Borsa Istanbul Xkury companies. Journal of Business Economics and Management, 22(4), 884-904.
Shao, L. (2019). Dynamic study of corporate governance structure and firm performance in China. Chinese Management Studies, 13(2), 299-317.
Skare, M., & Hasic, T. (2016). Corporate governance, firm performance, and economic growth–theoretical analysis. Journal of Business Economics and Management, 17(1), 35-51.
Thompson, C. G., Kim, R. S., Aloe, A. M., & Becker, B. J. (2017). Extracting the variance inflation factor and other multicollinearity diagnostics from typical regression results. Basic and Applied Social Psychology, 39(2), 81-90.
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press.
Velte, P. (2021). The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research. Management Review Quarterly, 1-59. https://doi.org/10.1007/s11301-021-00244-7
Vo, X. V., & Ellis, C. (2017). An empirical investigation of capital structure and firm value in Vietnam. Finance Research Letters, 22, 90-94.
Wasdani, K. P., Vijaygopal, A., Manimala, M. J., & Verghese, A. K. (2021). Impact of corporate governance on organisational performance of Indian firms. Indian Journal of Corporate Governance, 09746862211047396.
Werder, V. A., Talaulicar, T., & Kolat, G. L. (2005). Compliance with the German corporate governance code: An empirical analysis of the compliance statements by German listed companies. Corporate Governance: An International Review, 13(2), 178-187.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185-211.
Zaim, H., Demir, A., & Budur, T. (2021). Ethical leadership, effectiveness and team performance: An Islamic perspective. Middle East Journal of Management, 8(1), 42-66.
 
Iranian Journal of Management Studies
Volume 16, Issue 1
January 2023
Pages 79-95

Files

Share

How to cite

Statistics