The association between corporate governance and firm performance – a meta-analysis
| Date | 03 August 2015 |
| DOI | https://doi.org/10.1108/IJAIM-04-2014-0023 |
| Pages | 218-237 |
| Published date | 03 August 2015 |
| Author | Sayla Sowat Siddiqui |
| Subject Matter | Accounting & Finance,Accounting/accountancy,Accounting methods/systems |
The association between
corporate governance and rm
performance – a meta-analysis
Sayla Sowat Siddiqui
School of Economics and Finance, Queensland University of Technology,
Queensland, Australia
Abstract
Purpose – The purpose of this paper is to investigate the relationship between corporate governance
and rm performance by conducting a meta-analysis of 25 previous studies. The analysis has three
specic concerns, i.e. the moderating effects of legal systems (common law or civil law), governance
mechanisms (external or both external and internal governance together) and performance measures
(accounting or market value).
Design/methodology/approach – The methodology used is the meta-analysis technique developed
by Hunter et al. (1982).
Findings – The ndings show that the external governance mechanisms measured by anti-takeover
provisions and market value of rm performance measured by Tobin’s Q and market to book value are
the key moderators of this relationship.
Practical implications – This paper has important implications for regulators and directors by
proposing external governance to be an inuential factor of rm performance. This paper is also of
interest to the investors and companies by highlighting the signicant relationship between corporate
governance and market value of the rm.
Originality/value – As the author nds that the external governance mechanism (anti-takeover
provisions) exerts more inuential effect on rm performance than both external and internal governance
together, this research conrms the imperative for external governance to increase the rm value.
Keywords Corporate governance, Firm performance, Meta-analysis, Market value,
External governance
Paper type Research paper
1. Introduction
Despite the substantial proliferation of corporate governance codes since 1978 and the
empirical nding of a correspondingly large body of research, good governance failed to
prevent the global nancial crisis. Therefore, question arises whether good governance
benets modern rms or it is just the cost of doing business in today’s global markets. Is
there any association between corporate governance and rm performance? Do differences
in governance mechanism provide any valuable information to capital market participants
to identify better performing rms? These and many others related questions remain a
matter of debate because research has not yet provided any conclusive answer.
The purpose of this study is to dig deep into the literature of corporate governance to
clarify the understanding of the relationship between corporate governance and rm
The author acknowledges Peter Verhoeven and Jonathan Bader for their insightful comments on
this research project.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1834-7649.htm
IJAIM
23,3
218
Received 12 April 2014
Revised 18 May 2014
Accepted 20 May 2014
InternationalJournal of
Accountingand Information
Management
Vol.23 No. 3, 2015
pp.218-237
©Emerald Group Publishing Limited
1834-7649
DOI 10.1108/IJAIM-04-2014-0023
performance. This paper synthesizes the research of 25 previous studies and conducts a
meta-analysis on their ndings. Meta-analytic studies are particularly benecial when a
signicant stream of research yields inconsistent results so that the relationship among
the variables can be examined in a more systematic and rigorous way than is possible in
a typical literature review (Hunter and Schmidt, 1990).
This paper classies the literature into three broad perspectives such as legal
systems, governance measures and performance measures, which underpin the
previous studies. The rst perspective, legal systems arises from the argument of La
Porta et al. (2002) that corporate governance varies signicantly across countries
because of the differences in legal origin. The common law countries appear to exhibit
better corporate governance than civil law countries, resulting in higher market value of
rms (Anderson and Gupta, 2009). However, Yu (2011) nds a positive relation between
high-quality corporate governance and analysts’ recommendation for the rm in civil
law countries. The second perspective focuses on governance mechanisms. The early
studies, most notably Gompers et al. (2003) (hereafter GIM, 2003), give priority to
external governance mechanisms, measured by anti-takeover provisions. But some later
studies such as Cremers and Nair (2005),Brown and Caylor (2009) and Acharya et al.
(2011) argue that the complementary effect of both external and internal governance
(measured by shareholder rights) is more inuential on performance than just external
mechanisms. The third perspective considers the measurement of performance. One
stream of this research examines accounting measures such as return on assets (ROA)
and return on equity (ROE) while the other stream uses market measures such as
Tobin’s Q or market to book value (MBV). Accounting measures of performance are
criticized for their potential to be manipulated by managements (Cochran and Wood,
1984) whereas market value is widely accepted as a measure of performance. However,
Core et al. (2006) argue that accounting value ROA is an effective measure.
This study brings greater clarity to our understanding of the association between
corporate governance and rm performance through a synthesis of the available
literature. The meta-analysis provides statistical evidence which establishes that
external governance mechanism, measured by anti-takeover provisions, has the most
signicant impact on performance. It also nds that the inuence of corporate
governance is better reected by market value than by accounting value of the rm.
The remainder of this study is structured as follows: Section 2 provides a literature
review of the studies on the association between corporate governance and rm
performance. Section 3 describes the methodology and the sample of articles analysed.
Section 4 presents the results of our meta-analysis, and Section 5 presents the conclusion
and suggestions for further research.
2. Prior literature
A wide range of empirical studies examines the impact of corporate governance on rm
performance. This literature can be divided into three broad perspectives:
(1) the impact of legal systems;
(2) the impact of differing governance measures; and
(3) the differing measures of rm performance.
Each of these strands of literature is discussed below.
219
Corporate
governance
and rm
performance
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