The Relationship between Corporate Governance and Firm Performance from International Perspective

BuiPhanNhaKhanh TV pdf 1 Queen’s Management School Queen’s University Belfast 2014/2015 MSc Dissertation THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND FIRM PERFORMANCE FROM INTERNATIONAL PERSPECTI[.]

Queen’s Management School Queen’s University Belfast 2014/2015 MSc Dissertation THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND FIRM PERFORMANCE FROM INTERNATIONAL PERSPECTIVE Bui Phan Nha Khanh 40142258 Presented for MSc Finance This project is entirely the original work of student registration number 40142258 Where material is obtained from published or unpublished works, this has been fully acknowledged by citation in the main text and inclusion in the list of references Word Count: 14,191 words (The word count excludes references, title page, acknowledgement, tables of contents, list of figures, tables and abbreviations) 25th August, 2015 Abstract This research provides an empirical assessment of the governance – performance relationship using data from ten developed countries with 920 firms during 2006-2014 After controlling for time invariant effects, the result indicates a strong association between board size and both measures of performance, Tobin’s Q and return on assets I find evidence against the recommendations that more independent and female directors on board or the separation of CEO and chairman position lead to higher level of return on assets No significant estimations of board independence and gender diversity are cited for Tobin’s Q whereas longer tenure of CEO is significantly correlated with higher Q ratio Overall, my finding supports that small board size with the balanced existence of insiders and outsiders are more effective Keywords: Corporate governance, firm performance, international perspective Acknowledgements I would like to express my heartiest gratitude to everyone who provides me the possibility to complete this dissertation This dissertation would never be able to complete without the support of my respectable supervisor, Dr Gareth Campbell, who is extremely knowledgeable about the field of corporate finance He had spent his valuable time to give advices, share experiences with me all the way long I am truly grateful for having such a wonderful supervisor A great thanks to my classmates in MSc Finance, MSc Risk Management and MSc Computational Finance programmes, especially to Tripti Sharma, Christine Wen-Chieh Tai, David Xiang Zhao, Randy Wang, Yaqi Kang, Tong Wang, Matthew Eastwood, for their cooperation, suggestions as well as encouragement not only in classes but also in my daily life I appreciate their help and treasure all the best memories with those amazing friends Finally, I would like to offer my deepest thank to my beloved family and my boyfriend, who always support me, stand by my side and give me strength to overcome difficulties Table of Contents Abstract Acknowledgements List of Tables List of Figures List of Abbreviations Chapter - Introduction Chapter - Literature Reviews 11 2.1 THEORIES OF CORPORATE GOVERNANCE 11 2.1.1 Agency Theory 11 2.1.2 Stewardship Theory 12 2.2 RELEVANT RESEARCH IN CORPORATE GOVERNANCE 13 2.3 PRACTICES OF CORPORATE GOVERNANCE 13 2.4 VARIABLES SELECTION AND HYPOTHESIS DEVELOPMENT 19 Chapter - Data and Methodology 25 3.1 DATA 25 3.1.1 Introduction to sample data 25 3.1.2 Descriptive Statistics of Variables 28 3.1.3 Variance Inflation Factor 34 3.1.4 Correlation Matrix 35 3.2 METHODOLOGY 37 Chapter - Analysis and Regression 40 4.1 EXPLORATORY DATA ANALYSIS 40 4.2 REGRESSION ANALYSIS RESULTS 43 4.3 RESULTS OF REGRESSION ANALYSIS OF INDUSTRY EFFECTS 46 4.4 RESULTS OF REGRESSION ANALYSIS OF COUNTRY EFFECTS 47 4.5 RESULTS OF REGRESSION ANALYSIS OF TIME EFFECTS 49 4.6 REGRESSION ANALYSIS RESULT: ALTERNATIVE ECONOMETRIC METHODS 56 4.7 ADDITIONAL TEST OF BOARD SIZE – PERFORMANCE RELATIONSHIP 58 Chapter - Discussion and Conclusion 60 5.1 DISCUSSION 60 5.2 CONCLUSION 63 References 67 List of Tables Table 2.1 Summary of Governance Code in different countries 15 Table 2.2 Previous research concerning governance performance relationship 17 Table 3.1 Description of variables 26 Table 3.2 Descriptive Statistics of Variables 28 Table 3.3 Descriptive Statistics of Sample Firms by Industry 32 Table 3.4 Descriptive Statistics of Sample Firms by Country 33 Table 3.5 Variance Inflation Factor of Regression Variables 34 Table 3.6 Pearson Correlation Matrix 36 Table 4.1 Comparison of means of regression variables for firms with different governance characteristics 40 Table 4.2 Econometric Estimations of the relationship between firm performance and corporate governance 43 Table 4.3 Econometric Estimations of relationship between firm performance (Tobin's Q) and corporate governance in different industries 50 Table 4.4 Econometric estimations of relationship between firm performance (ROA) and corporate governance in different industries 51 Table 4.5 Econometric estimations of relationship between firm performance (Tobin's Q) and corporate governance in different countries 52 Table 4.6 Econometric estimations of relationship between firm performance (ROA) and corporate governance in different countries 53 Table 4.7 Econometric estimations of relationship between firm performance (Tobin's Q) and corporate governance across time 54 Table 4.8 Econometric estimations of relationship between firm performance (ROA) and corporate governance across time 55 Table 4.9 Econometric estimations of relationship between firm performance and corporate governance: IV-2SLS and IV-GMM estimators 56 Table 4.10 Regression result of number of board meetings and percentage of meeting attendance on board size 58 Table 5.1 Comparison of Hypothesis Expectation and Empirical Results 60 List of Figures Figure 3.1 Percentage of firms involved by country and list of stock market indices of sample firms 25 Figure 3.2 The percentage of firms involved by industry 26 Figure 3.3 Board Characteristics of Sample Firms (2006-2014) 29 Figure 3.4 Leadership Characteristics of Sample Firms (2006-2014) 29 Figure 3.5 Description of Firm Performance (2006-2014) 30 List of Abbreviations US : The United States UK : The United Kingdom EU : European Union ROA : Return on Assets ROE : Return on Equity CEO : Chief Executive Officer NACD : National Association of Corporate Directors IRRC : Investor Responsibility Research Center GIM : Gompers, Ishii and Metrick BCF : Bebchuk, Cohen and Ferrell OLS : Ordinary Least Square FE : Fixed Effect RE : Random Effect IV : Instrumental Variable 2SLS : Two-Stage Least Squares GMM : Generalized Method of Moments