Corporate governance practices and comprehensive income

• DOI: https://doi.org/10.1108/CG-01-2017-0011
• Pages: 462-477
• Date: 13 February 2018
• Published date: 13 February 2018
• Author: Erika López-Quesada,María-del-Mar Camacho-Miñano,Samuel O. Idowu
• Subject Matter: Corporate governance,Strategy

Corporate governance practices and

comprehensive income

Erika L�

opez-Quesada, María-del-Mar Camacho-Miñano and Samuel O. Idowu

Abstract

Purpose – The purpose of this paper is to analyze the effect of corporate governance practices on firms’

financial performance, as measured by comprehensive income (CI).

Design/methodology/approach – Using a sample of 237 firms from the Standards & Poor (S&P) 500

index during the years 2004-2009, multivariate statistical analyses are conducted to confirm the authors’

main hypothesis.

Findings – The results indicate that having high levels of corporate governance culture has a positive

impact on a measure of firms’ financial performance, namely, CI. Furthermore, they indicate a positive

correlation between a higher percentage of external directors and financial performance, and a negative

relationship between number of board meetings and financial performance.

Originality/value – The main contribution of this research is that good corporate governance strategies

deliver superior financial performance for businesses in terms of CI. This serves as a method of value

creation, which is the ultimate goal of a business. In addition to the use of CI as an indicator of financial

performance, a unique measure of corporate governance level is tested.

Keywords Financial performance, Corporate governance, Board of directors, Financial reporting

Paper type Research paper

1. Introduction

Research interest in the concept of “corporate governance” has grown considerably over

the past decade (Calder �

on and Villab�

on, 2017), particularly as a result of recent economic

crises. Some studies suggest that high levels of corporate governance may reduce

managers’ earnings manipulations and tendency to commit fraud; in addition, it may

achieve a higher quality of information transparency (Prior et al., 2008; Scholtens and Kang,

2012; Shi et al., 2017). Incidents of frauds are related to the boards of directors’ decisions,

as boards of directors are seen as the instrument used by shareholders to monitor the

behavior of top managers (Fama and Jensen, 1983). However, actions intended to improve

corporate governance have information-processing and opportunity costs for firms; the

questions then become, do these strategies have a positive impact on companies’ results,

and do corporate governance strategies create value for companies? If the answers to

these questions are “yes”, managers would invest in corporate governance, because this

strategy will impact positively on firms’ future performance (Bozec and Dia, 2015).

The origins of corporate governance go back many years, to the time when ownership and

management of businesses first became separated in accordance with the agency theory.

However, measuring, for example, the true independence of a board director is difficult

because of the subjectivity and intangibility of this concept (Abdo and Fisher, 2007). There

are two main approaches to minimizing agency problems, namely, improving corporate

governance structure (Baek et al., 2009; Cerbioni and Parbonetti, 2007; Patelli and

Prencipe, 2007; Valenti et al., 2011) and promoting greater transparency of information

(Ferna

´ndez-Rodrı

´guez et al., 2004; Price et al., 2011). However, when considering the

Erika L�

opez-Quesada is

Assistant Professor at the

Department of Business

Administration, Universidad

Camilo Jose Cela,

Villafranca del Castillo,

Spain.

Marı

´a-del-Mar Camacho-

Min

˜ano is Associate

Professor at the

Department of Accounting

and Finance, Faculty of

Business Administration

and Economics,

Complutense University of

Madrid, Madrid, Spain.

Samuel O. Idowu is based

at the Faculty of Business

and Law, London

Metropolitan University,

London, UK.

Received 11 January 2017

Revised 25 August 2017

26 October 2017

Accepted 23 December 2017

PAGE 462 jCORPORATE GOVERNANCE jVOL. 18 NO. 3 2018, pp. 462-477, © Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-01-2017-0011

implementation of these approaches, it should be determined if either or both strategies will

have a positive impact on financial performance; otherwise, there will be unnecessary

costs. Prior studies have explored the effects of corporate governance measures on firm

performance, although empirical findings are mixed (Rodriguez-Fernandez et al., 2014;

Sami et al., 2011; Wang et al., 2016). One reason for these inconclusive findings could be

the use of different approaches to measuring corporate governance. Some authors have

used composite measures of corporate governance as indexes, while others have used

individual corporate governance attributes, such as board characteristics or ownership

structure (Jackling and Johl, 2009; Klapper and Love, 2004; Richart-Ram�

on et al., 2011).

However, specific corporate governance mechanisms, such as the size and composition of

boards and leverage and firm size, tend to mitigate the occurrence of agency costs in the

USA (Garanina and Kaikova, 2016).

The objective of this paper is to investigate the impact of firms’ corporate governance

structures on their performance; this is done with the intention of reducing information

asymmetry and assisting companies to achieve their central purpose, the creation of value.

Using a sample of 237 companies (1,422 firm-year observations) listed on the Standards &

Poor (S&P) 500 index during the period between 2004 and 2009, we hypothesize that

having high levels of corporate governance culture will have a positive impact on firms’

financial performance. The hypotheses are tested using general linear regression models.

We develop our own index of corporate governance level, which takes into account the

variables that have the greatest effect on the internal characteristics of boards of directors,

to determine the corporate governance culture level of a company. Comprehensive income

(CI) is more closely related to the fluctuation of share prices and exchange rates than

traditionally used net income; thus, it is much more in accordance with the market reality

(Arimany Serrat et al., 2011; Kanagaretnam et al., 2009).

Our main contribution is the evidence offered to support the notion that having a high level

of corporate governance culture has a positive impact on a firm’s financial performance.

This finding serves as an incentive for managers to develop superior corporate governance

strategies, as doing so will have a positive impact on a firm’s profitability. In addition, the

use of CI to measure accounting results could serve as explanatory with both stock price

and returns, predicting future profitability in line with Bratten et al. (2016). It also takes into

account not only economic profit but also the creation of value. To the best of our

knowledge, no prior studies have used CI to measure firms’ performance related to

corporate governance issues.

The paper proceeds as follows: in Section 2, we present background research into

corporate governance and the hypothesis. Section 3 provides an overview of the research

design, including the details of the research sample and the methodology. Section 4

summarizes the findings; finally, Section 5 concludes this research by discussing its main

implications and limitations.

2. Corporate governance and firm performance

From the agency theory perspective, guidelines for the relationships between managers

and owners are warranted; they should protect shareholders’ interests through

implementing codes of good governance. The agency theory suggests that a better-

governed firm should demonstrate superior performance due to lower agency costs (Rani

et al., 2014; Sami et al., 2011). However, there is no consensus in the existing literature with

regard to how corporate governance or performance outcomes should be measured. This

topic is a central issue confronting corporate governance scholars, and some areas of

research into corporate governance still draw intense interest (Bozec et al., 2010; Kumar

and Zattoni, 2013). Some previous empirical studies, such as those of Gompers et al.

(2003), Brown and Caylor (2006, 2009) and Dittmar and Mahrt-Smith (2007) and others,

support the link between corporate governance and firm performance, although some

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