Internal Corporate Governance Mechanisms and the Performance of Firms in the Context of the Recent Financial Crisis: Evidence From the UK

Ahmad, Sardar (2013). Internal Corporate Governance Mechanisms and the Performance of Firms in the Context of the Recent Financial Crisis: Evidence From the UK. PhD thesis The Open University.



Various theories that underpin corporate governance research predict that strong internal corporate governance mechanisms enhance the operating and financial performance of firms. These theories also predict that strong internal corporate governance mechanisms would increase firms’ chances of survival during a financial crisis. This thesis tests these theoretical claims and makes a contribution by analysing the underlying governance-performance relationship from multiple theoretical perspectives (i.e. agency theory, stewardship theory and resource dependence theory) across three time periods. Adopting an index-based approach, the thesis investigates the impact of non-compliance with the UK corporate governance code on the performance of firms. The thesis also contributes to methodological approaches in this context by investigating the impact of non-compliance on the survival of firms during the financial crisis. Applying fixed and random effects models, a sample of 274 UK listed firms is analysed for the period 2003-2010.

The results show that non-compliance is, unexpectedly, positively associated with the performance of non-financial firms. This indicates that non-compliant firms outperformed compliant firms. However, although statistically not significant, the results also show that for non-financial firms, non-compliance decreases a firm’s chances of survival during the financial crisis. For financial firms the results are mixed for different measures of performance and across different time periods. The thesis extends knowledge of the governance-performance relationship by showing that non-compliance has different implications for firms across different time periods and industries.

The thesis makes another contribution to knowledge by investigating the. relationship between individual corporate governance mechanisms and performance. In this regard, it makes three contributions. First, it shows that board independence is negatively associated with performance, which supports the stewardship theory. For non-financial firms as predicted by resource dependence theory board independence is positively associated with performance only in the crisis period. Second, it provides evidence that extra board committees are negatively associated with the performance of firms and renders support to the agency theory. Third, it shows that internal control mechanisms are positively associated with performance in the period before the financial crisis, but during the financial crisis they negatively affect the performance of firms in both financial and non-financial sectors. This finding supports the two alternative views from the agency theory perspective in this context.

These results demonstrate the benefits of the ‘comply or explain’ principle of corporate governance which provides firms with a choice either to comply with the recommended codes or explain their non-compliance. The results also imply that the effect of various corporate governance mechanisms on the performance of firms varies between the financial and non-financial sectors. Finally, the results imply that the governance-performance relationship is very complex and could be better explained by adopting multiple theoretical perspectives rather than using a single theory to understand it.

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