Corporate Governance and Financial Performance: A Developing Economy Perspective

This paper investigates the influence of firm-level corporate governance on financial performance of the listed firms in Bangladesh. Agency theory suggests that better corporate governance reduces the expropriation costs, which in turn, enhances the investors’ confidence in the firm’s future cash flow and growth prospects, leading to a higher firm valuation. Likewise, a decrease in private benefits is likely to cause an improved operating performance. This paper uses a corporate governance index (CGI), comprising of the three dimensions - shareholder rights, independence and responsibilities of the board and management, and financial reporting and disclosures. The study results partly confirm the prediction of the agency theory, with a statistically significant positive relationship between the firm’s corporate governance quality and its valuation, even though the relationship between firm level corporate governance and operating performance seems inconclusive.