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More on the relationship between corporate governance and firm performance in the UK: Evidence from the application of generalized method of moments estimation
Poletti-Hughes, J. El-Faitouri, R. Shah, S.Z.A.
Poletti-Hughes, J.
El-Faitouri, R.
Shah, S.Z.A.
Publication Date
2016-09
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© 2016 Elsevier B.V. All rights reserved. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license.
Peer-Reviewed
Yes
Open Access status
openAccess
Accepted for publication
29/03/2016
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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.
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Accepted manuscript
Citation
Akbar S, Poletti-Hughes J, El-Faitouri R et al (2016) More on the relationship between corporate governance and firm performance in the UK: Evidence from the application of generalized method of moments estimation. Research in International Business and Finance. 38: 417-429.
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Article