In this study we analyze the impact of corporate governance on the financial performance of a sample of EM firms and ADRs based in 22 emerging countries over a period extending from 2008–2014. Our analysis is restricted to this seven-year period because of the scarcity of reliable governance data before 2008. The countries are drawn from the 22 best performing emerging markets for the year 2014, as ranked by the Bloomberg Visual Data. The ranking is based on each country’s GDP growth, inflation, the level of government debt, the annual change in government debt, currency purchasing power, and total investment as percentage of GDP. The 22 emerging countries in ranked order are: China, South Korea, Malaysia, Chile, Thailand, Panama, Peru, Latvia, Poland, Czech Republic, Columbia, Turkey, Hungary, Russia, Brazil, Philippines, Mexico, Indonesia, South Africa, Morocco, India and Egypt. Unfortunately, Morocco, Latvia, Egypt and the Czech Republic have been dropped from the sample because of missing firm-year observations. Moreover, our sample of ADRs excludes Malaysia, Chile, Thailand, Panama, Peru, Poland, Colombia, Philippines and India, either because these ADRs do not exist or because the data are missing for these countries. In total, the sample comprises 10,045 non-cross listed EM firm-year observations of companies that are publicly traded on the stock market of 18 EM countries and 610 cross-listed ADR firm-year observations of companies trading on the NASDAQ and NYSE in the US. Show
The financial and corporate governance data on the EM firms and ADRs were accessed through the Bloomberg Database.Financial performance is measured by the return on assets ratio (ROA), estimated by dividing a company’s annual net income by its total assets. In the literature, ROA is frequently used as a measure for profitability and financial performance, especially in studies investigating corporate governance structure [51, 52, 53]. A firm’s Governance Score was attained from the Bloomberg Professional database and is based on the extent of a company’s governance disclosure, where the score ranges from 0.1 for companies that disclose a minimum amount of governance data to a maximum of 100. The Independent Directorsvariable is measured as the number of independent directors on the board divided by the board size; Committeesis measured as the total number of committees (including audit, nomination and compensation committees) established by the company and ranges between a value of 0 and 3; CEO Dualityis employed as a dummy variable that takes a value of 1 if the CEO of the company also serves as the chairman of the board and 0 otherwise; Ethics policyalso is a dummy variable that takes a value of 1 if the company has a formal ethics policy and 0 otherwise. Finally, we include a market-based measure of risk, the CAPM-beta, as a moderator between governance and performance, because of its frequent use in the literature [30, 43, 44, 54]. For each firm, beta (βt) is estimated for each year tbased on daily stock prices: a beta greater than 1 indicates that a stock is more volatile than the market. To control for potentially confounding, exogenous factors, we include a number of company, industry and country-level variables. At the firm level, we control for leverage because of its significant impact on performance through the cost of capital and capital budgeting decisions [55, 56]. Leverage is measured as the ratio of total debt to total assets. We also include Tobin’s Q to control for investment and growth opportunities, because it diverges considerably across countries and captures important elements of firm performance [57, 58]. Tobin’s Q is measured as the sum of a firm’s market capitalization, total liabilities, preferred equity and minority interest divided by total assets. We also control for firm size, which is computed as the log of a firm’s total assets. Industry effects are captured using nine indicator variables; one for each Industry Classification Benchmark (ICB) code. The nine relevant industries include oil and gas, basic materials, industrials, consumer goods, health care, consumer services, telecommunications, utilities, financials and technology. Finally, we employ an indicator variable for each country to control for possible fixed effects related to the national origin of a firm. Studies concerned with the effect of corporate governance on firm performance remains comparatively under-researched in Middle East countries and Jordan in particular (Najib, 2007; Omet, 2004; Marashdeh, 2014). Moreover, studies investigating whether the practice of corporate governance has the same impact on family firm performance are still relatively less well known than those when ownership is distributed widely (non-family firms) (Jaggi, Leung and Gul, 2009; Prencipe and Bar-Yosef, 2011). This research is seeking to fill this current gap in Jordan, which is one of the developing countries with an emerging economics that are very poorly represented in the literature. What is the relationship between governance and performance?If a relationship between governance and performance exists, as has been postulated in the literature, a change in performance is likely to occur at some point after a board decision: provided the decision has been actioned effectively by management.
What is the relationship between corporate governance and company performance?Well-managed corporate governance mechanisms play an important role in improving corporate performance. Good corporate governance is fundamental for a firm in different ways; it improves company image, increases shareholders' confidence, and reduces the risk of fraudulent activities [67].
What is the relationship between financial reporting and corporate governance?Thus, corporate governance can increase the transparency of financial reporting and increase the company's value. Ho and Wong (2001), Eng and Mak (2003) and Mohd Ghazali and Weetman (2006) showed that there is a positive and significant correlation between corporate governance and scope of business unit disclosure.
Is there a relationship between corporate governance and financial management decisions?The study reveals that important corporate governance measures, such as insider ownership, board size, presence of corporate governance committees, the percentage of directors serving on the boards of other firms and CEO duality, are associated with financial management decisions and firm performance.
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