Comparative Study of the Impact of Compliance with Corporate Governance Regulations & Internal Governance Mechanisms on Financial Performance of Listed Firms in Africa

Areneke, Geofry Nfortaw Agbor (2018). Comparative Study of the Impact of Compliance with Corporate Governance Regulations & Internal Governance Mechanisms on Financial Performance of Listed Firms in Africa. PhD thesis The Open University.



This thesis examines and compares the impact of internally generated alternative corporate governance structures and compliance with country-level corporate governance regulations on financial performance of listed firms in South Africa and Nigeria. Firm-level data for the study was collected manually and triangulated with Datastream dataset for 100 listed firms for the period 2010–2014 (500 firm-years) in South Africa and 80 listed firms for the period 2011–2015 (400 firm-years) in Nigeria. Adopting a multi-theoretical approach and more importantly New Institutional Economics (NIE) theory, this study shows that cultural, contextual and institutional similarities and differences in corporate governance mechanisms across different countries impact differently on firm-level behaviour, which affects firm financial performance differently.

Empirically, the thesis shows there is a statistically significant positive effect of compliance with Nigerian and South African corporate governance code (compliance index model) on firm accounting performance (ROCE). This implies that firms that comply with corporate governance regulations in both countries benefit from increasing accounting returns more than firms that do not. However, results based on market performance (Q-ratio) show that compliant firms with King III corporate governance guidelines in South Africa are associated with decreasing market valuation (Q-ratio), whereas firms compliant with Nigeria SEC 2011 corporate governance regulations are associated with increasing market valuation (Q-ratio).

The alternative internal corporate governance mechanisms (variables in the equilibrium variable models) show similar and consistent mixed results compared to those reported by previous studies. Specifically, in South Africa, excluding board size which showed consistent negative statistically significant coefficients across both performance measures, the rest of the internal mechanisms are either statistically significant with one performance measure but insignificant with the other performance measure or significant with both measures but with contradictory signs of coefficients. Similarly, in Nigeria, out of the 14 firm-level internal corporate governance structures, six showed insignificant results irrespective of the performance measure, whereas six showed significant results with one performance measure and insignificant results with the other. Only gender diversity and ethnic diversity showed consistent statistically significant coefficients across both firm financial performance proxies.

The study contributes to corporate governance literature in many ways. First it shows the level of maturity in governance institutions, in addition to normative rules and informal norms across countries, has a significant bearing on firm-level governance practices. More so, historical and contextual path dependence has produced a diversity of firm-level and country-level specific internal CG structures that may work well within an institutional environment in which they have evolved but may not work in others. The resulting consequence is that in countries with developed or more mature governance institutions (e.g. South Africa), stock markets undervalue firms with high compliance with normative governance rules, whereas in countries with emerging/growing governance institutions (e.g. Nigeria), stock markets highly value firms’ compliance with normative governance guidelines. Furthermore, the impact of compliance with normative CG guidelines on firm accounting performance in countries with mature governance institutions (South Africa) is similar to that with emerging governance institutions (Nigeria). More so, despite institutional voids, firms in African markets are committed in improving governance institutions by adopting recommended good CG practices implemented by regulatory authorities. Hence emerging African economies are adopting institutional isomorphic practices in governance compliance. Specifically, firms in these markets are transmitting good governance institutions to emerging economies by improving on their CG practices.

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