Corporate governance and firm performance: does sovereign rating matter?

• DOI: https://doi.org/10.1108/CG-08-2020-0369
• Published date: 09 September 2021
• Date: 09 September 2021
• Pages: 243-256
• Subject Matter: Strategy,Corporate governance
• Author: Duterval Jesuka,Fernanda Maciel Peixoto

Corporate governance and f‌irm

performance: does sovereign rating

matter?

Duterval Jesuka and Fernanda Maciel Peixoto

Abstract

Purpose –This paper aims to investigatethe impact of sovereign rating and corporate governanceon

performanceof Latin American companies between2004 and 2018.

Design/methodology/approach –This study performeda multilevel regression with fixed and random

coefficients for 823 companies and verified the impacts of country, firm and time levels on the

performance variation.The study alternated return on assets and Tobin’ Q as dependent variables and

measured governanceusing the following variables:board size, chief executive officer/chairmanduality,

CEO/board memberduality, dummy for the chairman as a former CEO, auditcommittee, independence

and expertiseof the audit committee.

Findings –Latin American companies performed better when their respective countrieshave a better

sovereign rating and when they adopt better board of directors and audit committee mechanisms.

Sovereignrating assumes distinct roles depending on the presenceor absence of governance variables.

Rating andgovernance may be substitute mechanismsto protect investors.

Originality/value –To the best of theauthors’ knowledge, this paper is the first to investigatethe impacts

of sovereign ratingon firm performance in the Latin American scenario. The use of governancemetrics –

for example, the auditcommittee expertise and the dummy for chairmanas a former CEO –is innovative

in Latin Americanstudies.

Keywords Latin America, Firm performance, Corporate governance, Sovereign rating

Paper type Research paper

1. Introduction

Decades after the emergence of the firm theory, exploring mechanisms that improve firm

performance while mitigating the agency’s conflict remains the object of study in the

financial literature. Jensen and Meckling (1976) report that the agency problem has major

implications for company value. Contemporary studies have focused on improving

corporate governance mechanisms, which are principles that govern the relationship

between managers and shareholders and affect interested parties (AlHares, 2020;Saleem

et al.,2021

).

Many studies have focused on the impacts of corporate governance on companies’

performance both at country (Adedeji et al.,2020;Rashid, 2020;Vairavan and Zhang,

2020) and multi-country levels (Maranho and Leal, 2018;Aslam and Haron, 2021). The

different rules between countries have led to different instruments to create corporate

governance quality indexes, which often consider protection of shareholders, transparency

of information, board structure, ownership structure and managers’ compensation (Alipour

et al.,2019

;AlHares, 2020). Authors in the financial literature have investigated separately

the relationship between corporate governance and firm performance (Adedeji et al.,2020;

Daryaei and Fattahi, 2020;Jara et al.,2018;Noguera, 2020). However, in addition to the

Duterval Jesuka is based at

the Business and

Management Faculty,

Federal University of

Uberla

ˆndia –Santa Mo

ˆnica

Campus, Uberla

ˆndia,

Brazil. Fernanda Maciel

Peixoto is based at the

Business and Management

Faculty, Federal University

of Uberla

ˆndia –Santa

Mo

ˆnica Campus,

Uberla

ˆndia, Brazil.

Received 31 August 2020

Revised 12 February 2021

12 July 2021

27 July 2021

Accepted 15 August 2021

The authors thank the Research

Support Foundation of the State

of Minas Gerais (Fundac¸a

˜ode

Amparo a

`Pesquisa do Estado

de Minas Gerais –FAPEMIG),

the Coordination for the

Improvement of Higher

Education Personnel (CAPES)

and the Organization of

American States (OAS) for

funding this research.

DOI 10.1108/CG-08-2020-0369 VOL. 22 NO. 2 2022, pp. 243-256, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 243