The Impact of Corporate Governance on Firm Performance: Panel Data Evidence from Top 100 Listed Stock Exchanges in Malaysia. The objective of this research was to investigate the relationship between corporate governance and firm performance.
INTRODUCTION
- Introduction
- Research Background
- Problem Statement
- Research Objectives
- Research Questions
- Significance of the Study
- Chapter Layout
A recent study by Mohamad et al. 2020) examined the relationship between corporate governance and firm performance by analyzing data from 180 Malaysian listed companies from 2013 to 2017. Based on a survey conducted from 2000 to 2017, the relationship between corporate governance and firm performance remains unclear.
LITERATURE REVIEW
Introduction
Corporate Governance
Building on the successful implementation of the Cadbury Code (December 1992) and the Hampel Report (January 1998) in the UK, where both committees confirmed that the implementation of the Code has led to higher standards of governance and greater awareness of governance, The MCCG, which was developed by the Working Group on Best Practices in Corporate Governance (JPK1) and subsequently endorsed by the high-level Finance Committee on Corporate Governance, was introduced in March 2000 (MCCG, 2000). Independent directors make up at least half of the board; a majority, for large companies.
Literature Review
- Independent Variables and Hypothesis Development
- CEO Duality (CDUAL)
- Board Size (BSIZE)
- Board Independence (BIND)
- Number of Board Meetings (BMEET)
- Number of Women Directors (WOMD)
- Number of Directors with Foreign Qualifications (FORD)
- Dependent Variables
- Earnings per Share (EPS)
- Tobin’s Q (TOBQ)
- Return on Equity (ROE)
H4A: BMEET of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (EPS). H4B: BMEET of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (TOBQ). H4C: BMEET of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (ROE).
H5A: WOMD among the top 100 listed firms of Bursa Malaysia is significantly related to firm performance (EPS). H5B: WOMD among the top 100 listed firms of Bursa Malaysia is significantly related to firm performance (TOBQ). H5C: WOMD of the top 100 Bursa listed companies in Malaysia has a significant relationship with firm performance (ROE).
H6C: FORD among the top 100 listed companies of Bursa Malaysia is significantly related to firm performance (ROE).
Theoretical Perspective of Corporate Governance
- Agency Theory
- Stewardship Theory
- Stakeholder Theory
- Resource Dependency Theory
Stewardship theory states that a company's managers are individuals who can be trusted and who naturally have good character to become good stewards of the company. The stewardship theory states that the directors, as stewards of the company, naturally have the best interests of the company in mind since good performance would contribute to a greater sense of achievement. This contradicts agency theory, which raises concerns about the possibility that a problem could arise when the directors act in self-interest rather than the interest of shareholders.
Corporate management practices developed on the basis of stewardship theory are likely to emphasize the empowerment of the directors as the stewards of the company. A corporate governance practice that has been recommended in light of the stakeholder theory is the need to disclose a company's ESG practices which is now a key focus of MCCG 2021. The resource dependence theory (Pfeffer and Salancik, 1978) considers that the board of directors plays an important role in opening access of a company to other resources relevant to the company's business.
Corporate governance practices that were recommended with resource dependence theory in mind are board composition and board diversity, whereby board members are encouraged to be diversified in terms of age, race, gender, qualifications to create a wide range of perspectives during decision making. - manufacturing.
Research Framework
Conceptual Framework
METHODOLODY
- Introduction
- Research Design
- Data Collection Method
- Sampling Design
- Target Population
- Sampling Frame
- Sampling Element
- Sampling Technique
- Sample Size
- Research Instrument
- Construct Measurement
- Data Processing
- Data Analysis
- Descriptive Analysis
- Panel Data Analysis
This study uses secondary data from Bloomberg corporate annual reports and financial data of the 100 largest listed companies in Bursa Malaysia over the period 2013 to 2019. The top 100 listed companies were identified based on the Top 100 companies with good corporate governance information of 2019, as provided on MSWG's website, after which each company's annual report for the relevant years was downloaded from Bursa Malaysia's website. Based on the objective of this study to investigate the relationship between corporate governance and business performance of the top 100 Bursa Malaysia listed companies, it was determined that the target audience would be the top 100 companies listed on the MSWG website under the Top 100 Companies for Overall Corporate Governance of 2019. (CG) and performance.
The sample for this study consists of 100 listed companies in Bursa Malaysia, identified by MSWG as the top 100 listed companies in terms of overall CG and performance. The sampling frame is the same as that of the target population as this study aims to determine the relationship between corporate governance and business performance of the top 100 listed companies in Bursa Malaysia. To achieve the purpose of this research, we selected the top 100 Malaysian listed companies based on MSWG's top 100 listed companies for overall CG and performance in 2019.
While the target population is MSWG's top 100 listed companies for overall CG and performance, a full set of data over the period 2013 to 2019 is required to qualify as a sample element.
RESEARCH RESULTS
Introduction
Descriptive Analysis
- Dependent Variables
- Independent Variables
In this research, CDUAL is a dummy variable and the results from the descriptive analysis showed that the number of companies practicing CEO duality, or the non-separation of roles between the chairman and the CEO, was the highest in 2013 with a total of 4 firms of 81 were found to practice CEO duality. This meant that most companies were sticking to the proposal put forward by MCCG. This corresponds to many research papers which state that at least half of the Board consists of independent directors, in accordance with MCCG 2017.
The minimum average of 4 board meetings corresponds to what MCCG 2000 considers the minimum board meetings required to effectively manage a company. The average number of female directors is remarkably low, which does not bode well for companies. This indicates that top 100 listed companies with CG value the diversity that foreign directors bring to the board.
Panel Data Analysis
- Earnings per Share (EPS)
- Hausman Test
- Random Effects Model
- Tobin’s Q (TOBQ)
- Hausman Test
- Fixed Effects Model
- Return on Equity (ROE)
- Hausman Test
- Fixed Effects Model
CDUAL, BIND, BMEET and WOMD are found to have no significant relationship with EPS with p-values greater than 0.1. The comparison shows that only WOMD has a positive relationship with TOBQ while CDUAL, BSIZE, BIND, BMEET and FORD have a negative relationship with TOBQ. However, only BIND, BMEET and WOMD have a significant relationship with TOBQ, at a significance level of 1%, all with p-values of 0.0000.
On the other hand, CDUAL, BSIZE and FORD were found to have no significant relationship with TOBQ with p-values higher than 0.1. The comparison shows that only WOMD has a positive relationship with ROE while CDUAL, BSIZE, BIND, BMEET and FORD have a negative relationship with TOBQ. Five out of the six independent variables were found to have a significant relationship with ROE.
Of all the independent variables, only FORD had no significant relationship with ROE.
DISCUSSION AND CONCLUSION
Introduction
Hypothesis Testing
- Summary of Hausman Test Results for EPS, TOBQ, and ROE
- Summary of p-values for EPS, TOBQ, and ROE
- Summary of Hypothesis Testing
H1A: CDUAL of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (EPS). H1C: CDUAL of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (ROE). H3C: BIND of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (ROE).
H6B: FORD of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (TOBQ). H1B: CDUAL of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (TOBQ). H3B: BIND of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (TOBQ).
H6A: FORD of the Top 100 Listed Companies in Bursa Malaysia has a significant relationship with Firm Performance (EPS).
Summary of Tests
- Descriptive Analysis
- Dependent Variables
- Independent Variables
- Inferential Analysis
- Panel Data Analysis (7-year Analysis)
The results of the panel data analysis indicated a negative relationship between FORD and ROE with a p-value of 0.2112, which is insignificant at 1%, 5% and 10% level. To conclude the analysis of the relationship between FORD and the company's performance, it was found that FORD positively affects the company's performance in terms of EPS, but does not have a significant relationship on TOBQ and ROE, although indicators show a negative relationship. The results of the panel data analysis have provided evidence of the relationship between corporate governance and corporate performance in the 81 companies selected from the Top 100 Companies for Overall CG and Performance in 2019, ranked by the MSWG.
There was a positive but insignificant relationship between board independence (BIND) and earnings per share, while a significant negative relationship was found between BIND and TOBQ and ROE. The results of the analysis between board meetings (BMEET) and firm performance showed an insignificant negative relationship between BMEET and EPS and a significant negative relationship between BMEET and TOBQ or ROE. Analysis of female directors (WOMD) and firm performance revealed that there is an insignificant positive relationship between WOMD and EPS and a significant positive relationship between WOMD and TOBQ or ROE.
Finally, the relationship between directors with foreign qualifications (FORD) and firm performance revealed a significant positive relationship between FORD and EPS, but an insignificant negative relationship between FORD and TOBQ or ROE.
Discussion on Findings
Firm performance (EPP and ROE) is also negatively affected by board size, indicating that the larger the board size, the lower the firm's performance. The negative relationship between board size and firm performance can also be attributed to the additional resources that must be met when there are more directors on the board (Ibrahim and Abdul Samad, 2011). Board independence was also found to negatively affect the firm's performance in terms of its TOBQ and ROE.
Another perspective on this observation is that although a large number of independent directors is seen to provide a good check and balance, it can lead to over-monitoring that prevents strategic actions from being taken, ultimately leading to a reduced firm performance (Darmadi, 2013b; . Shamsudin et al., 2018). It was also found that the number of board meetings negatively affects the firm's performance in terms of the TOBQ and ROE indicating that the higher the number of board meetings, the more the firm's performance decreases. This can be attributed to the large number of board meetings which is a sign of poor management.
Contrary to the previous findings, such as Abdullah et al. 2012), female directors were found to positively affect firm performance in terms of TOBQ and ROE.
Limitations of the Research
Recommendations for Future Research
Conclusion
This study was conducted with the main objective to examine the impact of corporate governance on the firm performance of the top 100 publicly listed companies in Malaysia. The impact of board of directors characteristics on firm performance: Evidence from public listed companies in Malaysia. The relationship between corporate governance attributes and firm performance before and after the revised code.
The implications of the revised code of corporate governance on firm performance", Journal of Accounting in Emerging Economies, Vol. CEO duality, board independence, corporate governance and firm performance in family firms: Evidence from the manufacturing industry in Malaysia. Board gender diversity and firm performance : Empirical evidence from Hong Kong, South Korea, Malaysia and Singapore.
Corporate Governance Practices and Firm Performance under the Revised Code of Corporate Governance: Evidence from Malaysia.
