Empirical Evidence on the Link Between Compliance with Governance of Best Practice and Firms' Operating Results

• Main Author: Tek B. Lama
• Format: Article
• Language: English
• Published: University of Wollongong 2012-12-01
• Series: Australasian Accounting, Business and Finance Journal
• Subjects: Corporate governance; Agency theory; Mid-cap; Best practice; Horwath report
• Online Access: http://ro.uow.edu.au/aabfj/vol6/iss5/5

This study provides robust evidence in support of the agency theory argument that corporate governancematters for a firm’s operating performance. Using the corporate governance ratings as the governance proxyfrom Horwath 2006 Corporate Governance Report (mid-sized Australian ASX companies) andMid-CapCorporate Governance Report 2007 (The University of Newcastle 2006; 2007), I examine 60 sample firms toreveal that a firm’s governance is positively and significantly related to firm performance as measured by returnon equity, earning yield and return on assets. This study extends the findings of these two reports which founda disturbing trend in the corporate governance practice of Australian mid-cap companies – both a decrease incompanies with excellent corporate governance, and an increase in companies with significant corporategovernance deficiencies. The findings of this study suggest that those mid-size companies who have allowedcorporate governance to deteriorate have adversely affected their shareholder returns.