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On the relation between corporate governance compliance and operating performance

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  • Heidi Bauwhede

Abstract

Better corporate performance has been cited as one of the main benefits of adopting good corporate governance structures within organisations. However, in contrast to theory, a prior European study (Bauer et al., 2004) reports evidence of a negative relationship between corporate governance and corporate performance. This study re‐examines this relationship, and reports evidence of a positive relationship between the extent of compliance with international best practices concerning board structure and functioning and operating performance when operating performance is measured by the return on assets (ROA). This result is robust to controlling for the firms’ compliance with best practices in other governance areas, and holds for some other governance dimensions, namely disclosure of corporate governance and the range of takeover defences. Further tests indicate that greater compliance with international best practices concerning board structure and functioning is significantly associated with reporting less income from asset disposals and that studying a performance measure that includes this item obscures the inherently positive relationship between operating performance and the extent of compliance with international best practices regarding board structure and functioning. The results provide some support for an oftencited motivation for the adoption of good governance practices, and provide explicit evidence that the measure of operating performance is crucial in examining firm‐level operating performance.

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  • Heidi Bauwhede, 2009. "On the relation between corporate governance compliance and operating performance," Accounting and Business Research, Taylor & Francis Journals, vol. 39(5), pages 497-513.
    • Handle: RePEc:taf:acctbr:v:39:y:2009:i:5:p:497-513
    DOI: 10.1080/00014788.2009.9663380
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    4. Akbar, Saeed & Poletti-Hughes, Jannine & El-Faitouri, Ramadan & Shah, Syed Zulfiqar Ali, 2016. "More on the relationship between corporate governance and firm performance in the UK: Evidence from the application of generalized method of moments estimation," Research in International Business and Finance, Elsevier, vol. 38(C), pages 417-429.
    5. Saurabh Chadha & Anil K. Sharma, 2015. "Capital Structure and Firm Performance: Empirical Evidence from India," Vision, , vol. 19(4), pages 295-302, December.
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    9. Armin Wiedenegger & Alexander Kern & Maria Rupprechter, 2012. "The Choice of Legal Form and its Effects on Good Governance: A Case Study of an Austrian Professional Soccer Club," Ekonomika a Management, Prague University of Economics and Business, vol. 2012(3), pages 23-43.
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