Corporate Governance and Financial Performance: A Developing Economy Perspective

Faizul Haque, Thankom Arun, Colin Kirkpatrick

Research output: Working paper

Abstract

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.
Original languageEnglish
Publication statusPublished - Oct 2014

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Developing economies
Corporate governance
Financial performance
Agency theory
Operating performance
Financial disclosure
Confidence
Bangladesh
Costs
Investors
Private benefits
Responsibility
Cash flow
Firm valuation
Governance indexes
Expropriation
Shareholder rights
Prediction
Financial reporting

Keywords

  • corporate governance index, agency theory, financial performance, Bangladesh

Cite this

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Corporate Governance and Financial Performance: A Developing Economy Perspective. / Haque, Faizul; Arun, Thankom; Kirkpatrick, Colin.

2014.

Research output: Working paper

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AB - 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.

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