IDEAS home Printed from https://ideas.repec.org/a/spr/futbus/v7y2021i1d10.1186_s43093-021-00093-6.html
   My bibliography  Save this article

The impact of corporate governance measures on firm performance: the influences of managerial overconfidence

Author

Listed:
  • Tolossa Fufa Guluma

    (University of International Business and Economics)

Abstract

The paper aims to investigate the impact of corporate governance (CG) measures on firm performance and the role of managerial behavior on the relationship of corporate governance mechanisms and firm performance using a Chinese listed firm. This study used CG mechanisms measures internal and external corporate governance, which is represented by independent board, dual board leadership, ownership concentration as measure of internal CG and debt financing and product market competition as an external CG measures. Managerial overconfidence was measured by the corporate earnings forecasts. Firm performance is measured by ROA and TQ. To address the study objective, the researcher used panel data of 11,634 samples of Chinese listed firms from 2010 to 2018. To analyze the proposed hypotheses, the study employed system Generalized Method of Moments estimation model. The study findings showed that ownership concentration and product market competition have a positive significant relationship with firm performance measured by ROA and TQ. Dual leadership has negative relationship with TQ, and debt financing also has a negative significant association’s with both measures of firm performance ROA and TQ. Moreover, the empirical results also showed managerial overconfidence negatively influences the relationship of board independence, dual leadership, and ownership concentration with firm performance. However, managerial overconfidence positively moderates the impact of debt financing on firm performance measured by Tobin’s Q and negative influence on debt financing and operational firm performance relationship. These findings have several contributions: first, the study extends the literature on the relationship between CG and a firm’s performance by using the Chinese CG structure. Second, this study provides evidence that how managerial behavioral bias interacts with CG mechanisms to affect firm performance, which has not been studied in previous literature. Therefore, the results of this study contribute to the theoretical perspective by providing an insight into the influencing role of managerial behavior in the relationship between CG practices and firm performance in an emerging markets economy. Hence, the empirical result of the study provides important managerial implications for the practice and is important for policy-makers seeking to improve corporate governance in the emerging market economy.

Suggested Citation

  • Tolossa Fufa Guluma, 2021. "The impact of corporate governance measures on firm performance: the influences of managerial overconfidence," Future Business Journal, Springer, vol. 7(1), pages 1-18, December.
    • Handle: RePEc:spr:futbus:v:7:y:2021:i:1:d:10.1186_s43093-021-00093-6
    DOI: 10.1186/s43093-021-00093-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1186/s43093-021-00093-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1186/s43093-021-00093-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Marina A. Zavertiaeva & Félix J. López†Iturriaga & Evgeniia V. Kuminova, 2018. "Better innovators or more innovators? Managerial overconfidence and corporate R&D," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 39(4), pages 447-461, June.
    2. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    3. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    4. Florian Englmaier, 2011. "Commitment in R&D tournaments via strategic delegation to overoptimistic managers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 32(1), pages 63-69, January.
    5. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    6. Lihui Tian & Saul Estrin, 2007. "Debt financing, soft budget constraints, and government ownership Evidence from China1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 15(3), pages 461-481, July.
    7. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    8. Ho, Po-Hsin & Huang, Chia-Wei & Lin, Chih-Yung & Yen, Ju-Fang, 2016. "CEO overconfidence and financial crisis: Evidence from bank lending and leverage," Journal of Financial Economics, Elsevier, vol. 120(1), pages 194-209.
    9. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    10. Li, Ke & Lu, Lei & Mittoo, Usha R. & Zhang, Zhou, 2015. "Board independence, ownership concentration and corporate performance—Chinese evidence," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 162-175.
    11. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
    12. Uribe-Bohorquez, María-Victoria & Martínez-Ferrero, Jennifer & García-Sánchez, Isabel-María, 2018. "Board independence and firm performance: The moderating effect of institutional context," Journal of Business Research, Elsevier, vol. 88(C), pages 28-43.
    13. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 191-213.
    14. Manoj Pant & Manoranjan Pattanayak, 2010. "Corporate Governance, Competition and Firm Performance," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(3), pages 347-381, December.
    15. Kim, E. Han & Lu, Yao, 2011. "CEO ownership, external governance, and risk-taking," Journal of Financial Economics, Elsevier, vol. 102(2), pages 272-292.
    16. Dong‐Sung Cho & Jootae Kim, 2007. "Outside Directors, Ownership Structure and Firm Profitability in Korea," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(2), pages 239-250, March.
    17. Brown, Rayna & Sarma, Neal, 2007. "CEO overconfidence, CEO dominance and corporate acquisitions," Journal of Economics and Business, Elsevier, vol. 59(5), pages 358-379.
    18. Li Liu & Wen Qu & Janto Haman, 2018. "Product market competition, state-ownership, corporate governance and firm performance," Asian Review of Accounting, Emerald Group Publishing Limited, vol. 26(1), pages 62-83, February.
    19. Richard Bozec, 2005. "Boards of Directors, Market Discipline and Firm Performance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1921-1960, November.
    20. Liu, Yu & Miletkov, Mihail K. & Wei, Zuobao & Yang, Tina, 2015. "Board independence and firm performance in China," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 223-244.
    21. Aggarwal, Reena & Erel, Isil & Ferreira, Miguel & Matos, Pedro, 2011. "Does governance travel around the world? Evidence from institutional investors," Journal of Financial Economics, Elsevier, vol. 100(1), pages 154-181, April.
    22. Gillan, Stuart L., 2006. "Recent Developments in Corporate Governance: An Overview," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 381-402, June.
    23. Quanxi Liang & Leng Ling & Jingjing Tang & Haijian Zeng & Mingming Zhuang, 2019. "Managerial overconfidence, firm transparency, and stock price crash risk," China Finance Review International, Emerald Group Publishing Limited, vol. 10(3), pages 271-296, November.
    24. J B Heaton, 2002. "Managerial Optimism and Corporate Finance," Financial Management, Financial Management Association, vol. 31(2), Summer.
    25. Chen, Anlin & Lu, Cheng-Shou, 2015. "The effect of managerial overconfidence on the market timing ability and post-buyback performance of open market repurchases," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 234-251.
    26. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    27. Sami, Heibatollah & Wang, Justin & Zhou, Haiyan, 2011. "Corporate governance and operating performance of Chinese listed firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 20(2), pages 106-114.
    28. Chen Lin & Yue Ma & Dongwei Su, 2009. "Corporate governance and firm efficiency: evidence from China's publicly listed firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(3), pages 193-209.
    29. Boone, Audra L. & Casares Field, Laura & Karpoff, Jonathan M. & Raheja, Charu G., 2007. "The determinants of corporate board size and composition: An empirical analysis," Journal of Financial Economics, Elsevier, vol. 85(1), pages 66-101, July.
    30. Jia-Hua Tsai & Shiow-Ying Wen, 2013. "Intellectual Capital, Corporate Governance and Firm Performance," Information Management and Business Review, AMH International, vol. 5(10), pages 482-491.
    31. Alessandra Capezio & John Shields & Michael O'Donnell, 2011. "Too Good to be True: Board Structural Independence as a Moderator of CEO Pay‐for‐Firm‐Performance," Journal of Management Studies, Wiley Blackwell, vol. 48(3), pages 487-513, May.
    32. Dong, Jing & Gou, Yan-nan, 2010. "Corporate governance structure, managerial discretion, and the R&D investment in China," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 180-188, April.
    33. Liu, Qigui & Tang, Jinghua & Tian, Gary Gang, 2013. "Does political capital create value in the IPO market? Evidence from China," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 395-413.
    34. Koke, Jens & Renneboog, Luc, 2005. "Do Corporate Control and Product Market Competition Lead to Stronger Productivity Growth? Evidence from Market-Oriented and Blockholder-Based Governance Regimes," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 475-516, October.
    35. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    36. Phua, Kenny & Tham, T. Mandy & Wei, Chishen, 2018. "Are overconfident CEOs better leaders? Evidence from stakeholder commitments," Journal of Financial Economics, Elsevier, vol. 127(3), pages 519-545.
    37. Paul Hribar & Holly Yang, 2016. "CEO Overconfidence and Management Forecasting," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 204-227, March.
    38. Shokrollah Khajavi & Golamreza Dehghani, 2016. "Board Characteristics and Managerial Overconfidence in an Emerging Market," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 529-537.
    39. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
    40. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    41. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    42. Huang, Wei & Jiang, Fuxiu & Liu, Zhibiao & Zhang, Min, 2011. "Agency cost, top executives' overconfidence, and investment-cash flow sensitivity -- Evidence from listed companies in China," Pacific-Basin Finance Journal, Elsevier, vol. 19(3), pages 261-277, June.
    43. Nguyen, Tuan & Locke, Stuart & Reddy, Krishna, 2014. "A dynamic estimation of governance structures and financial performance for Singaporean companies," Economic Modelling, Elsevier, vol. 40(C), pages 1-11.
    44. Hazar Ben Barka & François Legendre, 2017. "Effect of the board of directors and the audit committee on firm performance: a panel data analysis," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(3), pages 737-755, September.
    45. Brian K. Boyd, 1995. "CEO duality and firm performance: A contingency model," Strategic Management Journal, Wiley Blackwell, vol. 16(4), pages 301-312.
    46. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    47. Richard Bozec, 2005. "Boards of Directors, Market Discipline and Firm Performance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1921-1960.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Edosa Joshua Aronmwan & Sebastine Abhus Ogbaisi, 2022. "The nexus between standalone risk committees and tax aggressiveness: evidence from Nigeria," Future Business Journal, Springer, vol. 8(1), pages 1-12, December.
    2. Ria Ria, 2023. "Determinant Factors of Corporate Governance on Company Performance: Mediating Role of Capital Structure," Sustainability, MDPI, vol. 15(3), pages 1-14, January.
    3. Julia Bettina Leicht & Maximilian Leicht, 2022. "Changes in the climate-related disclosure of German listed companies during the first years of the new reporting standard," Future Business Journal, Springer, vol. 8(1), pages 1-12, December.
    4. Sattar Khan & Yasir Kamal & Muhammad Abbas & Shahid Hussain, 2022. "Board of directors and earnings manipulation: evidence from regulatory change," Future Business Journal, Springer, vol. 8(1), pages 1-22, December.
    5. Prof. Dr. Arhan Sthapit & Dr. Rashesh Vaidya, 2024. "Corporate Governance Practices in South Asia: A Comparative Study of India and Nepal," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 15(1), pages 19-25, January.
    6. Damianus Abun & Frelyn B. Ranay & Theogenia Magallanes & Mary Joy Encarnacion, 2022. "The effect of corporate governance on the individual work performance of employees: The case of private higher education," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 11(3), pages 92-98, April.
    7. Tariq H. Ismail & Mohamed El-Deeb & Yasser Tawfik Halim, 2022. "Do related party transactions affect the relationship between political connections and firm value? Evidence from Egypt," Future Business Journal, Springer, vol. 8(1), pages 1-12, December.
    8. Hossein Tarighi & Zeynab Nourbakhsh Hosseiny & Maryam Akbari & Elaheh Mohammadhosseini, 2023. "The Moderating Effect of the COVID-19 Pandemic on the Relation between Corporate Governance and Firm Performance," JRFM, MDPI, vol. 16(7), pages 1-43, June.
    9. Dominika Gajdosikova & Katarina Valaskova & Tomas Kliestik & Maria Kovacova, 2023. "Research on Corporate Indebtedness Determinants: A Case Study of Visegrad Group Countries," Mathematics, MDPI, vol. 11(2), pages 1-30, January.
    10. Abebe Negeri Shonte & Quan Ji, 2022. "Management Commitment and Sustainable Coffee Export Performance, Evidence from Ethiopian Companies: The Mediating Role of Corporate Social Responsibility," Sustainability, MDPI, vol. 14(19), pages 1-19, October.
    11. Leviticus Mensah & Murad Abdurahman Bein, 2023. "Sound Corporate Governance and Financial Performance: Is There a Link? Evidence from Manufacturing Companies in South Africa, Nigeria, and Ghana," Sustainability, MDPI, vol. 15(12), pages 1-24, June.
    12. Trina Saha & Rubel Miah & Mahfujur Rahman & Sumon Kumar Das & Emranul Hoque, 2023. "Disclosures for slavery accounting concerning SDG 8 and corporate attributes: a study on the banking industry of Bangladesh," Future Business Journal, Springer, vol. 9(1), pages 1-11, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Naeem Tabassum & Satwinder Singh, 2020. "Corporate Governance and Organisational Performance," Springer Books, Springer, number 978-3-030-48527-6, December.
    2. Aziz Jaafar & Lynn Hodgkinson & Mao-Feng Kao, 2019. "Ownership Structure, Board of Directors and Firm Performance: Evidence from Taiwan," Working Papers 19011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    3. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    4. Lai Trung Hoang & Cuong Cao Nguyen & Baiding Hu, 2017. "Ownership Structure and Firm Performance Improvement: Does it Matter in the Vietnamese Stock Market?," Economic Papers, The Economic Society of Australia, vol. 36(4), pages 416-428, December.
    5. Ahmed Bouteska, 2020. "Do Board Characteristics Affect Bank Performance? Evidence from the Eurozone," Journal of Asset Management, Palgrave Macmillan, vol. 21(6), pages 535-548, October.
    6. Đặng, Rey & Houanti, L’Hocine & Reddy, Krishna & Simioni, Michel, 2020. "Does board gender diversity influence firm profitability? A control function approach," Economic Modelling, Elsevier, vol. 90(C), pages 168-181.
    7. Chen, Sheng-Syan & Peng, Shu-Cing & Yeh, Chia-Wei, 2023. "Does import competition from China discipline overconfident CEOs in U.S. firms?," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 277-297.
    8. Tolossa Fufa Gulema & Zhou Xiaoyan, 2021. "Mediating Role of Innovation Capacity in the Relationship between Corporate governance and Firm Performance: evidence from Chinese listed firms," International Journal of Science and Business, IJSAB International, vol. 5(4), pages 105-122.
    9. Gibson Hosea Munisi & Roy Mersland, 2016. "Ownership, Board Compensation and Company Performance in Sub-Saharan African Countries," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 15(2), pages 191-224, August.
    10. Ratnam Vijayakumaran, 2019. "Agency Costs, Ownership, and Internal Governance Mechanisms: Evidence from Chinese Listed Companies," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(1), pages 133-154, January.
    11. Omar Farooque & Wonlop Buachoom & Nam Hoang, 2019. "Interactive effects of executive compensation, firm performance and corporate governance: Evidence from an Asian market," Asia Pacific Journal of Management, Springer, vol. 36(4), pages 1111-1164, December.
    12. Gupta, C.P. & Bedi, Prateek, 2020. "Corporate cash holdings and promoter ownership," Emerging Markets Review, Elsevier, vol. 44(C).
    13. Damian Ward & Igor Filatotchev, 2010. "Principal-principal-agency relationships and the role of external governance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(4), pages 249-261.
    14. Jennifer Kunz & Lara Sonnenholzner, 2023. "Managerial overconfidence: promoter of or obstacle to organizational resilience?," Review of Managerial Science, Springer, vol. 17(1), pages 67-128, January.
    15. Tutun Mukherjee & Som Sankar Sen, 2022. "Impact of CEO attributes on corporate reputation, financial performance, and corporate sustainable growth: evidence from India," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-50, December.
    16. Chi, Jianxin (Daniel) & Gupta, Manu, 2009. "Overvaluation and earnings management," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1652-1663, September.
    17. James, Hui Liang & Borah, Nilakshi & Lirely, Roger, 2022. "The effectiveness of board independence in high-discretion firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 103-117.
    18. Chung, Chune Young & Hur, Seok-Kyun & Liu, Chang, 2019. "Institutional investors and cost stickiness: Theory and evidence," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 336-350.
    19. Goergen, Marc & Manjon, Miguel C. & Renneboog, Luc, 2008. "Recent developments in German corporate governance," International Review of Law and Economics, Elsevier, vol. 28(3), pages 175-193, September.
    20. Ahmed Bouteska & Mehdi Mili, 2022. "Does corporate governance affect financial analysts’ stock recommendations, target prices accuracy and earnings forecast characteristics? An empirical investigation of US companies," Empirical Economics, Springer, vol. 63(4), pages 2125-2171, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:futbus:v:7:y:2021:i:1:d:10.1186_s43093-021-00093-6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.