Non-compliance, board structures and the performance of financial firms during crisis: UK Evidence

Ahmad, Sardar; Kodwani, Devendra and Upton, Martin (2016). Non-compliance, board structures and the performance of financial firms during crisis: UK Evidence. In: International Finance and Banking Society (IFABS), Risk in Financial Markets and Institutions: New challenges, New solutions, 1-3 Jun 2016, Universitat Autònoma de Barcelona (UAB), Casa Convalescència, Barcelona.

Abstract

This paper examines the effectiveness of internal corporate governance mechanisms for improving the performance of financial firms in the UK. The research is first of its kind to look into the relationship between corporate governance and performance of financial firms in the UK before and during the financial crisis. Using Generalised Methods of Moments (GMM) estimates that control for dynamic endogeneity, this study shows that firm performance as measured by Total Shareholder Returns (TSR) and Return on Equity (ROE) is negatively associated with the level of non-compliance with the UK Corporate Governance Code. The study also finds that having higher number of internal controls is most effective monitoring mechanism and is positively associated with firm performance. However, board independence represented by the number of non-executive directs (NEDs) is the least effective monitoring mechanism and is negatively associated with the performance of firms. The study also shows that directors’ share ownership is an effective incentive mechanism for aligning their interests with shareholders as it is positively associated with firm performance. However, the findings suggest that remuneration is negatively associated with performance. Finally, the study provides evidence which indicates that board size impact the performance of firms differently in different time periods. As proposed by agency theory the study provides evidence that shows the positive impact of effective monitoring and incentive alignment for performance. It also provides support for the resource dependence view that directors are a critical resource during difficult economic times.

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