More on the relationship between corporate governance and firm performance in the UK: Evidence from the application of generalized method of moments estimation

Saeed Akbar, Jannine Poletti-Hughes, Ramadan El-Faitouri, S.Z.A. Shah

Research output: Contribution to journalArticlepeer-review

53 Citations (Scopus)

Abstract

This study examines the relationship between corporate governance compliance and firm performance in the UK. We develop a Governance Index and investigate its impact on corporate performance after controlling for potential endogeneity through the use of a more robust methodology, Generalized Method of Moments (GMM) Estimation. Our evidence is based on a sample of 435 non-financial publicly listed firms over the period 1999–2009. In contrast to earlier findings in the UK literature, our results suggest that compliance with corporate governance regulations is not a determinant of corporate performance in the UK. We argue that results from prior studies showing a positive impact of corporate governance on firms’ performance may be biased as they fail to control for potential endogeneity. There may be a possibility of reverse causality in the results of prior studies due to which changes in the internal characteristics of firms may be responsible for the corporate governance compliance and performance relationship. Our findings are based on GMM, which controls for the effects of unobservable heterogeneity, simultaneity and dynamic endogeneity and thus present more robust conclusions as compared to the findings of previously published studies in this area.
Original languageEnglish
Pages (from-to)417-429
Number of pages13
JournalResearch in International Business and Finance
Volume38
Early online date31 May 2016
DOIs
Publication statusPublished - 1 Sep 2016
Externally publishedYes

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