Corporate Governance and Financial Performance: a literature Review of Measurements and Econometric Methods of Data Analysis in Research

Abstract

One of the major challenges to policy makers is the identification of standard framework to examine the effects of corporate governance on firm financial performance. This study examines the key corporate governance and financial performance variables and the methods of data analysis used in academic research. The study observes that most studies use ownership structure and corporate boards as the key explanatory factors to firm performance. Ownership structure is defined by the percentage of shareholders who include: the government, foreign and institutional shareholders, large individuals and dispersed owners. Financial performance has been measured using three different types of indicators. Some studies use accounting-based ratios such as Return on Assets (ROA) and Return on Equity (ROE) while others use the Tobin’s Q ratio. Some studies also use efficiency indicators computed using the Data Envelopment Analysis (DEA) and Stochaistic Frontier Approach (SFA). It is also apparent that most studies in corporate governance research use panel data and the shareholding, corporate boards and financial information is extracted from financial reports obtained from the stock exchanges. Most of the studies use a combination of descriptive statistics, correlation and regression analysis to examine the relationships between ownership structure, corporate boards and firm performance. Due to problems associated with panel data, a unit root test is used to examine stationarity of data while a Hausman test determines whether to use a Fixed Effects (FE) or Random effects regression model. A regression model with a robust standard error option is often used to control for heteroskedasticity and contemporaneous correlation which may lead to spurious results.