CORPORATE GOVERNANCE AND FIRMS’ PERFORMANCE: EVIDENCE FROM DHAKA STOCK EXCHANGE
Keywords:
Corporate Governance (CG), ROA, ROE, EPS, Firm Performance, Board Effectiveness, Board of Directors, Audit Committee.
Abstract
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. This research aims to investigate the relationship between corporate governance and firm performance in a sample of 58 companies listed on the Dhaka Stock Exchange (DSE) using the data of 2016-2021. For this objective, this study used a number of corporate governance indices, including board size, board independence, members of the audit committee, and board effectiveness. The impact of those indices has been analyzed on the performance indicators of a firm like EPS, ROA and ROE. In this research, firm size and leverage ratio serve as control variables. In addition, the influence of independent factors on dependent variables has been analyzed using multiple linear regression. From the regression, the study found that board independence is a solo factor that is significant on the firm performance and has a positive impact. This research also observed no statistically significant correlation between Board Size, Board Effectiveness, and Audit Committee on the firms’ performance.
JEL Classification Codes: A1, A30, C1, G17, Y8.
References
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Andreou, P. C., Louca, C., & Panayides, P. M. (2014). Corporate governance, financial management decisions and firm performance: Evidence from the Maritime Industry. Transportation Research Part E: Logistics and Transportation Review, 63, 59-78. https://doi.org/10.1016/j.tre.2014.01.005
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Akbar, A. (2015). The role of corporate governance mechanism in optimizing firm performance: A conceptual model for corporate sector of Pakistan. Journal of Asian Business Strategy, 5(6), 109-115. https://doi.org/10.18488/journal.1006/2015.5.6/1006.6.109.115
Andreou, P. C., Louca, C., & Panayides, P. M. (2014). Corporate governance, financial management decisions and firm performance: Evidence from the Maritime Industry. Transportation Research Part E: Logistics and Transportation Review, 63, 59-78. https://doi.org/10.1016/j.tre.2014.01.005
Arora, A., & Sharma, C. (2016). Corporate governance and firm performance in developing countries: Evidence from India. Corporate Governance, 16(2), 420-436. https://doi.org/10.1108/cg-01-2016-0018
Beasley, M. S. (1996). An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud. The Accounting Review, 71(4), 443–465. Retrieved from http://www.jstor.org/stable/248566
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Black, B. S., Jang, H., & Kim, W. (2006). Does corporate governance predict firms' market values? evidence from Korea. Journal of Law, Economics, and Organization, 22(2), 366-413. https://doi.org/10.1093/jleo/ewj018
Boyd, B. K. (1995). CEO Duality and Firm Performance: A contingency model. Strategic Management Journal, 16(4), 301-312. https://doi.org/10.1002/smj.4250160404
Brickley, J. A., & Zimmerman, J. L. (2010). Corporate governance myths: comments on Armstrong, Guay, and Weber. Journal of Accounting and Economics, 50(2-3), 235-245. https://doi.org/10.1016/j.jacceco.2010.10.002
Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of corporate finance, 14(3), 257-273. https://doi.org/10.1016/j.jcorpfin.2008.03.006
Brown, L. D., & Caylor, M. L. (2008). Corporate governance and firm operating performance. Review of Quantitative Finance and Accounting, 32(2), 129-144. https://doi.org/10.1007/s11156-007-0082-3
Buallay, A., Hamdan, A., & Zureigat, Q. (2017). Corporate governance and firm performance: Evidence from Saudi Arabia. Australasian Accounting, Business and Finance Journal, 11(1), 78-98. https://doi.org/10.14453/aabfj.v11i1.6
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Cheng, S. (2008). Board size and the variability of corporate performance. Journal of Financial Economics, 87(1), 157-176. https://doi.org/10.1016/j.jfineco.2006.10.006
Conyon, M. J., & Peck, S. I. (1998). Board size and corporate performance: Evidence from European countries. The European Journal of Finance, 4(3), 291-304. https://doi.org/10.1080/135184798337317
Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson, J. L. (1998). Meta-analytic reviews of board composition, leadership structure, and financial performance. Strategic Management Journal, 19(3), 269-290. https://doi.org/10.1002/(sici)1097-0266(199803)19:3<269::aid-smj950>3.0.co;2-k
Deb, D. C., Sarker, A., & Siddique, F. (2021, February 03). Relationship between corporate governance and financial performance of banking industry in Bangladesh. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3735933
Denis, D., & Sarin, A. (1998). Ownership and board structures in publicly traded corporations. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.114590
Duchin, R., Matsusaka, J. G., & Ozbas, O. (2010). When are outside directors effective?☆. Journal of Financial Economics, 96(2), 195-214. https://doi.org/10.1016/j.jfineco.2009.12.004
Eisenberg, T., Sundgren, S., & Wells, M. T. (1998). Larger board size and decreasing firm value in small firms. Journal of Financial Economics, 48(1), 35-54. https://doi.org/10.1016/s0304-405x(98)00003-8
Fama, E. F., & French, K. R. (1995). Size and book-to-market factors in earnings and returns. The Journal of Finance, 50(1), 131-155. https://doi.org/10.1111/j.1540-6261.1995.tb05169.x
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and Control. The Journal of Law and Economics, 26(2), 301-325. https://doi.org/10.1086/467037
Fidell, S., Silvati, L., Howe, R., Pearsons, K. S., Tabachnick, B., Knopf, R. C., . . . Buchanan, T. (1996). Effects of aircraft overflights on Wilderness Recreationists. The Journal of the Acoustical Society of America, 100(5), 2909-2918. https://doi.org/10.1121/1.417102
Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics, 67(2), 217-248. https://doi.org/10.1016/s0304-405x(02)00252-0
García Martín, C. J., & Herrero, B. (2018). Boards of directors: Composition and effects on the performance of the firm. Economic Research-Ekonomska Istraživanja, 31(1), 1015-1041. https://doi.org/10.1080/1331677x.2018.1436454
Guest, P. M. (2009). The impact of board size on firm performance: Evidence from the UK. The European Journal of Finance, 15(4), 385-404. https://doi.org/10.1080/13518470802466121
Gul, F. A., & Tsui, J. S. (2004). Introduction and overview. The Governance of East Asian Corporations, 1-26. https://doi.org/10.1057/9780230523272_1
Habib, M. (2016, August 06). Relationship between corporate governance and firm performance: A case study in Bangladesh. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2819099
Haniffa, R., & Hudaib, M. (2006). Corporate governance structure and performance of Malaysian listed companies. Journal of business finance & accounting, 33(7‐8), 1034-1062. https://doi.org/10.1111/j.1468-5957.2006.00594.x
Hermalin, B. E., & Weisbach, M. S. (1991). The effects of board composition and direct incentives on firm performance. Financial Management, 20(4), 101. https://doi.org/10.2307/3665716
Hunjra, A., Naeem, H., Noor, A., & Saleem, A. (2018, August 23). Does corporate governance play role in firms' performance? A comparative study of Pakistan, India and Bangladesh. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3229746
Jensen, M. C. (1993). The Modern Industrial Revolution, exit, and the failure of Internal Control Systems. The Journal of Finance, 48(3), 831-880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x
John, K., & Senbet, L. W. (1998). Corporate Governance and board effectiveness. Journal of Banking & Finance, 22(4), 371-403. https://doi.org/10.1016/s0378-4266(98)00005-3
Jorgensen, B. N., Lee, Y. G., & Rock, S. (2013). The shapes of scaled earnings histograms are not due to scaling and sample selection: Evidence from distributions of reported earnings per share. Contemporary Accounting Research, 31(2), 498-521. https://doi.org/10.1111/1911-3846.12020
Klapper, L. F., & Love, I. (2004). Corporate governance, investor protection, and performance in emerging markets. Journal of Corporate Finance, 10(5), 703-728. https://doi.org/10.1016/s0929-1199(03)00046-4
Klein, A. (1998). Firm performance and Board Committee Structure. The Journal of Law and Economics, 41(1), 275-304. https://doi.org/10.1086/467391
Kosnik, R. D. (1987). Greenmail: A study of board performance in corporate governance. Administrative Science Quarterly, 32(2), 163-185. https://doi.org/10.2307/2393124
Kosnik, R. D. (1990). Effects of board demography and directors' incentives on corporate greenmail decisions. Academy of Management Journal, 33(1), 129-150. https://doi.org/10.2307/256355
Kumalasari, D., & Pratikto, H. (2018). Good corporate governance affects on corporate value through return on equity and return on asset of manufacture firm. KnE Social Sciences, 3(3), 114- 126. https://doi.org/10.18502/kss.v3i3.1878
Larcker, D. F., Richardson, S. A., & Tuna, I. (2007). Corporate governance, accounting outcomes, and organizational performance. The Accounting Review, 82(4), 963-1008. https://doi.org/10.2308/accr.2007.82.4.963
Lee, C. I., Rosenstein, S., Rangan, N., & III, W. N. (1992). Board composition and shareholder wealth: The case of management buyouts. Financial Management, 21(1), 58. https://doi.org/10.2307/3665681
Leng, A. C. (2004). The impact of corporate governance practices on firms´ financial performance: Evidence from Malaysian companies. Asean Economic Bulletin, 21(3), 308-318. https://doi.org/10.1355/ae21-3d
Lipton, M., & Lorsch, J. W. (1992, November). A modest proposal for improved corporate governance. The Business Lawyer, 48(1), 59-77. Retrieved from https://www.jstor.org/stable/pdf/40687360
Makhlouf, M. H., Laili, N. H., Basah, M. Y., & Ramli, N. A. (2017). Board of Directors’ Effectiveness and Firm Performance: Evidence from Jordan. Retrieved from https://core.ac.uk/download/pdf/234632111.pdf
Mashayekhi, B., & Bazaz, M. S. (2008). Corporate governance and firm performance in Iran. Journal of Contemporary Accounting & Economics, 4(2), 156-172. https://doi.org/10.1016/s1815-5669(10)70033-3
Mwambuli, E. L. (2019). Analysis of the role of corporate governance on listed firm’s capital structure: The East African Stock Markets Perspective. International Journal of Accounting and Financial Reporting, 9(3), 143-163. https://doi.org/10.5296/ijafr.v9i3.15411
Omran, M. M., Bolbol, A., & Fatheldin, A. (2008). Corporate governance and firm performance in Arab Equity Markets: Does Ownership Concentration Matter? International Review of Law and Economics, 28(1), 32-45. https://doi.org/10.1016/j.irle.2007.12.001
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Published
2023-02-17
How to Cite
Hasan, S. M., Hossain, S. A., Islam, R., & Hasan, M. M. (2023). CORPORATE GOVERNANCE AND FIRMS’ PERFORMANCE: EVIDENCE FROM DHAKA STOCK EXCHANGE. Indian Journal of Finance and Banking, 13(1), 28-38. https://doi.org/10.46281/ijfb.v13i1.1947
Section
Regular Research Article/ Short Communication Article
Copyright (c) 2023 Shaikh Masrick Hasan, Sk. Alamgir Hossain, Roushanara Islam, Md. Mahedi Hasan
This work is licensed under a Creative Commons Attribution 4.0 International License.
