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  • Published: 01 November 2021

The impact of corporate governance measures on firm performance: the influences of managerial overconfidence

  • Tolossa Fufa Guluma   ORCID: orcid.org/0000-0002-1608-5622 1  

Future Business Journal volume  7 , Article number:  50 ( 2021 ) Cite this article

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The paper aims to investigate the impact of corporate governance (CG) measures on firm performance and the role of managerial behavior on the relationship of corporate governance mechanisms and firm performance using a Chinese listed firm. This study used CG mechanisms measures internal and external corporate governance, which is represented by independent board, dual board leadership, ownership concentration as measure of internal CG and debt financing and product market competition as an external CG measures. Managerial overconfidence was measured by the corporate earnings forecasts. Firm performance is measured by ROA and TQ. To address the study objective, the researcher used panel data of 11,634 samples of Chinese listed firms from 2010 to 2018. To analyze the proposed hypotheses, the study employed system Generalized Method of Moments estimation model. The study findings showed that ownership concentration and product market competition have a positive significant relationship with firm performance measured by ROA and TQ. Dual leadership has negative relationship with TQ, and debt financing also has a negative significant association’s with both measures of firm performance ROA and TQ. Moreover, the empirical results also showed managerial overconfidence negatively influences the relationship of board independence, dual leadership, and ownership concentration with firm performance. However, managerial overconfidence positively moderates the impact of debt financing on firm performance measured by Tobin’s Q and negative influence on debt financing and operational firm performance relationship. These findings have several contributions: first, the study extends the literature on the relationship between CG and a firm’s performance by using the Chinese CG structure. Second, this study provides evidence that how managerial behavioral bias interacts with CG mechanisms to affect firm performance, which has not been studied in previous literature. Therefore, the results of this study contribute to the theoretical perspective by providing an insight into the influencing role of managerial behavior in the relationship between CG practices and firm performance in an emerging markets economy. Hence, the empirical result of the study provides important managerial implications for the practice and is important for policy-makers seeking to improve corporate governance in the emerging market economy.

Introduction

Corporate governance and its relation with firm performance, keep on to be an essential area of empirical and theoretical study in corporate study. Corporate governance has got attention and developed as an important mechanism over the last decades. The fast growth of privatizations, the recent global financial crises, and financial institutions development have reinforced the improvement of corporate governance practices. Well-managed corporate governance mechanisms play an important role in improving corporate performance. Good corporate governance is fundamental for a firm in different ways; it improves company image, increases shareholders’ confidence, and reduces the risk of fraudulent activities [ 67 ]. It is put together on a number of consistent mechanisms; internal control systems and external environments that contribute to the business corporations’ increase successfully as a complete to bring about good corporate governance. The basic rationale of corporate governance is to increase the performance of firms by structuring and sustaining initiatives that motivate corporate insiders to maximize firm’s operational and market efficiency, and long-term firm growth through limiting insiders’ power that can abuse over corporate resources.

Several studies are contributed to the effect of CG on firm performance using different market developments. However, there is no consensus on the role CG on firm performance, due to different contextual factors. The role of CG mechanisms is affected by different factors. Prior studies provided different empirical evidence such as [ 14 ], suggested that the monitoring efficiency of the board of directors is affected by internal and external factors like government regulation and internal firm-specific factors; the role of board monitoring is determined by ownership structure and firm-specific characters Boone et al. [ 8 ], and Liu et al. [ 57 ] and Bozec [ 10 ] also reported that external market discipline affects the internal CG role on firm performance. Moreover, several studies studied the moderation role of different variables in between CG and firm value. Mcdonald et al. [ 63 ] studied CEO experience moderating the board monitoring effectiveness, and [ 60 ] studied the moderating role of product market competition in between internal CG and firm performance. Bozec [ 10 ] studied market disciple as a moderator between the board of directors and firm performance. As to the knowledge of the researcher, no study considered the influencing role of managerial overconfidence in between CG mechanisms and firm corporate performance. Thus, this study aims to investigate the influence of managerial overconfidence in the relationship between CG mechanisms and firm performance by using Chinese listed firms.

Managers (CEOs) were able to valuable contributions to the monitoring of strategic decision making [ 13 ]. Behavioral decision theory [ 94 ] suggests that overconfidence, as one type of cognitive bias, encourages decision-makers to overestimate their information and problem-solving capabilities and underestimates the uncertainties facing their firms and the potential losses from litigation associated with claims against them. Several prior studies reported different results of the manager's role in corporate governance in different ways. Previous studies claimed that overconfidence is a dysfunctional behavior of managers that deals with unfavorable consequences for the firm outcome, such as value distraction through unprofitable mergers and suboptimal investment behavior [ 61 ], and unlawful activities (Mishina et al. [ 64 ]). Oliver [ 68 ] argued the human character of individual managers affects the effectiveness of corporate governance. Top managers' behaviors and experience are primary determinants of directors' ability to effectively evaluate their managerial decision-making [ 45 ]. In another way, [ 47 , 58 ] noted managerial overconfidence can encourage some risk and make up for managerial risk aversion, which leads to suboptimal investment decisions. Jensen [ 41 ] suggested in the presence of free cash flow, the manager may overinvest and they can accept a negative net present value project. Therefore, the existence of CG mechanisms aims to eliminate or reduce the effect of agency and asymmetric information on the CEO’s decisions [ 62 ]. This means that the objectives of CG mechanisms are to counterbalance the effect of such problems in the corporate organization that may affect the value of the firms in the long run. Even with the absence of agency conflicts and asymmetric information problems, there is evidence documented for distortions such as the case of corporate investment. Managers will over- or under-invest regarding their optimism level and the availability of internal cash flow.

Agency theory by Jensen and Meckling [ 42 ] has a very clear vision of the problems that exist in the company to know the disagreement of interests between shareholders and managers. Irrational behavior of management resulting from behavioral biases of executive managers is a great challenge in corporate governance [ 44 ]. Overconfidence may create more agency conflict than normal managers. It may lead internal and external CG mechanisms to decisions which damage firm value. The role of CG mechanisms mitigating corporate governance results from agency costs, information asymmetry, and their impact on corporate decisions. This means the behavior of overconfident executives may affect controlling and monitoring role of internal/external CG mechanisms. According to Baccar et al. [ 5 ], suggestion is that one of the roles of corporate governance is controlling such managerial behavioral bias and limiting their potential effects on the company’s strategies. These discussions lead to the conclusion that CEO overconfidence will negatively or positively influence the relationships of CG on firm performance. The majority of studies in the corporate governance field deal with internal problems associated with managerial opportunism, misalignment of objectives of managers and stakeholders. To deal with these problems, the firm may organize internal governance mechanisms, and in this section, the study provides a review of research focused on this specific aspect of corporate governance.

Internal CG includes the controlling mechanism between various actors inside the firm: that is, the company management, its board, and shareholders. The shareholders delegate the controlling function to internal mechanisms such as the board or supervisory board. Effective internal CG is essential in accomplishing company strategic goals. Gillan [ 30 ] described internal mechanisms by dividing them into boards, managers, shareholders, debt holders, employees, suppliers, and customers. These internal mechanisms of CG work to check and balance the power of managers, shareholders, directors, and stakeholders. Accordingly, independent board, CEO duality, and ownership concentration are the main internal corporate governance controlling mechanisms suggested by various researchers in the literature. Thus, the study considered these three internal corporate structures in this study as internal control mechanisms that affect firm performance. Concurrently, external CG mechanisms are mechanisms that are not from the inside of the firm, which is from the outside of the firms and includes: market competition, take over provision, external audit, regulations, and debt finance. There are a lot of studies that examine and investigate the effect of external CG practices on the financial performance of a company, especially in developed nations. In this study, product market competition and debt financing have been taken as representatives of external CG mechanisms. Thus, the study used internal CG measures; independent board, dual leadership, ownership concentration, and product-market competition, and debt financing as a proxy of external CG measures.

Literature review and hypothesis building

Corporate governance and firm performance.

Corporate governance has got attention and developed as a significant mechanism more than in the last decades. The recent financial crises, the fast growth of privatizations, and financial institutions have reinforced the improvement of corporate governance practices in numerous institutions of different countries. As many studies revealed, well-managed corporate governance mechanisms play an important role in providing corporate performance. Good corporate governance is fundamental for a firm in several ways: OECD [ 67 ] indicates the good corporate governance increases the company image, reduces the risks, and boosts shareholders' confidence. Furthermore, good corporate governance develops a number of consistent mechanisms, internal control systems and external environments that contribute to the business corporations’ increase effectively as a whole to bring about good corporate governance.

The basic rationale of corporate governance is to increase the performance of companies by structuring and sustaining incentives that initiate corporate managers to maximize firm’s operational efficiency, return on assets, and long-term firm growth through limiting managers’ abuse of power over corporate resources.

Corporate governance mechanisms are divided into two broad categories: internal corporate governance and external corporate governance mechanisms. Supporting this concept, Keasey and Wright [ 43 ] indicated corporate governance as a framework for effective monitoring, regulation, and control of firms which permits alternative internal and external mechanisms for achieving the proposed company’s objectives. The achievement of corporate governance relies on the mechanism effectiveness of both internal and external governance structures. Gillan [ 30 ] suggested that corporate governance can be divided into two: the internal and external mechanisms. Gillan [ 30 ] described internal mechanisms by dividing into boards, managers, shareholders, debt holders, employees, suppliers, and customers, and also explain external corporate governance mechanisms by incorporating the community in which companies operate, the social and political environment, laws and regulations that corporations and governments involved in.

The internal mechanisms are derived from ownership structure, board structure, and audit committee, and the external mechanisms are derived from the capital market corporate control market, labor market, state status, and investors activate [ 26 ]. The balance and effectiveness of the internal and external corporate governance practices can enhance a better corporate operational performance [ 21 ]. Literature argued that integrated and complete governance mechanisms are better with multi-dimensional theoretical view [ 87 ]. Thus, the study includes both internal and external CG mechanisms to broadly show the connection of these components. Filatotchev and Nakajima [ 26 ] suggest that an integrated approach bringing external and internal mechanisms jointly enhances to build up a more general view on the effectiveness and efficiency of different corporate governance mechanisms. Thus, the study includes both internal and external CG mechanisms to broadly show the connection of these three components.

Board of directors and ownership concentration are the main internal corporate governance mechanisms and product market competition and debt finance also the main representative of external corporate governance suggested by many researchers in the literature that were used in this study. Therefore, the following sections provide a brief discussion of internal and external corporate governance from different angles.

Independent board and firm performance

Board of directors monitoring has been centrally important in corporate governance. Jensen [ 41 ] board of directors is described as the peak of the internal control system. The board represents a firm’s owners and is responsible for ensuring that the firm is managed effectively. Thus, the board is responsible for adopting control mechanisms to ensure that management’s behavior and actions are consistent with the interest of the owners. Mainly the responsibility of the board of directors is selection, evaluation, and removal of poorly performing CEO and top management, the determination of managerial incentives and monitoring, and assessment of firm performance [ 93 ]. The board of directors has the formal authority to endorse management initiatives, evaluate managerial performance, and allocate rewards and penalties to management on the basis of criteria that reflect shareholders’ interests.

According to the agency theory board of directors, the divergence of interests between shareholders and managers is addressed by adopting a controlling role over managers. The board of directors is one of the key governance mechanisms; the board plays a pivotal role in monitoring managers to reduce the problems associated with the separation of ownership and management in corporations [ 24 ]. According to Chen et al. [ 16 ], the strategic role of the board became increasingly important and going beyond the mere approval of strategic management decisions. The board of directors must serve to reconcile management decisions with the objectives of shareholders and stakeholders, which can at times influence strategic decisions (Uribe-Bohorquez [ 85 ]). Therefore, the board's responsibilities extend beyond controlling and monitoring management, ensuring that it takes decisions that are reliable with the corporations [ 29 ]. In the perspective of resource dependence theory, an independent director is often linked firm to outside environments, who are non-management members of the board. Independent boards of directors are more believed to be effective in protecting shareholders' interests resulting in high performance [ 26 ]. This focus on board independence is grounded in agency theory, which addresses inefficiencies that arise from the separation of ownership and control [ 24 ]. As agency theory perspective boards of directors, particularly independent boards are put in place to monitor managers on behalf of shareholders [ 59 ].

A large number of empirical studies are undertaken to verify whether independent directors perform their governance functions effectively or not, but their results are still inconclusive. Studies [ 2 , 50 , 52 , 56 , 85 ], reported the supportive arguments that independent board of directors and firm performance have a positive relationship; in other ways, a large number of studies [ 6 , 17 , 65 91 ], and findings indicated the independent director has a negative relation with firm performance. The positive relationship of independent board and firm performance argued that firms which empower outside directors may lead to their more effective monitoring and therefore higher firm performance. The negative relationship of independent board and firm performance results are based on the argument that external directors have no access to information about the internal business of the firms and their relation with internal management does not allow them to have a sufficient understanding of the firm’s day-to-day business activities or it may arise from the lack of knowledge of the business or the ability to monitor management actions [ 28 ].

Specifically in China, the corporate governance regulation code was approved in 2001 and required that the board of all Chinese listed domestic companies must include at least one-third of independent directors on their board by June 2003. Following this direction, many listed firms had appointed more independent directors, with a view to increase the independence of the board [ 54 ]. This proclamation is staying stable till now, and the number of independent directors in Chinese listed firms is increasing from time to time due to its importance. Thus, the following hypothesis is proposed.

Hypothesis 1

The proportion of independent directors in board members is positively related to firm performance.

Dual leadership and firm performance

CEO duality is one of the important board control mechanisms of internal CG mechanisms. It refers to a situation where the firm’s chief executive officer serves as chairman of the board of directors, which means a person who holds both the positions of CEO and the chair. Regarding leadership and firm performance relation, there are different arguments; there is not consistent conclusion among different researchers. There are two competitive views about dual leadership in corporate governance literature. Agency theory view proposed that duality could minimize the board’s effectiveness of its monitoring function, which leads to further agency problems and enhance poor performance [ 41 , 83 ]. As a result, dual leadership enhances CEO entrenchment and reduces board independence. In this condition, these two roles in one person made a concentration of power and responsibility, and this may result in busyness of CEO which affects the normal duties of a company. This means the CEO is responsible to execute a company’s strategies, monitoring and evaluating the managerial activities of a company. Thus, separating these two roles is better to avoid concentration of authority and power in one individual and separate leadership of board from the ruling of the business [ 72 ].

On the other hand, stewardship theory suggests that managers are good stewards of company resources, which could benefit a firm [ 9 ]. This theory advocates that there is no conflict of interest between shareholders and managers, if the role of CEO and chairman vests on one person, rather CEO duality would promote a clear sense of strategic direction by unifying and strengthening leadership.

In the Chinese firm context, there are different conflicting conclusions about the relationship between CEO duality and firm performance.

Hypothesis 2

CEO duality is negatively associated with firm performance.

Ownership concentration and firm performance

The ownership structure is which has a profound effect on business strategy and performance. Agency theory [ 81 ] argued that concentrated ownership can monitor corporate operating management effectively, alleviate information problems and agency costs, consequently, improve firm performance. The concentration of ownership as a large number of studies grounded in agency theory suggests that it has both the incentive and influence to assure that managers and directors operate in the interests of shareholders [ 19 ]. Concentrated ownership presence among the firm’s investors provides an important driver of good CG that should lead to efficiency gains and improvement in performance [ 81 ].

Due to shareholder concentrated economic risk, these shareholders have a strong encouragement to watch strictly over management, making sure that management does not engage in activities that are damaging the wealth of shareholders. Similarly, Shleifer and Vishny [ 80 ] argue that large share blocks reduce managerial opportunism, resulting in lower agency conflicts between management and shareholders.

In other ways, some researchers have indicated, block shareholders harmfully on the value of the firm, especially when majority shareholders can abuse their position of dominant control at the expense of minority shareholders [ 25 ]. As a result, at some level of ownership concentration the distinction between insiders and outsiders becomes unclear, and block-holders, no matter what their identity is, may have strong incentives to switch resources to the ways that make them better off at the cost of other shareholders. However, concentrated shareholding may create a new set of agency conflicts that may provide a negative impact on firm performance.

In the emerging market context, studies [ 77 , 90 ] find a positive association between ownership concentration and accounting profit for Chinese public companies. As Yu and Wen [ 92 ] argued, Chinese companies have a concentrated ownership structure, limited disclosure, poor investor protection, and reliance on the banking system. As this study argues, this concentration is more controlled by the state, institution, and private shareholders. Thus, ownership concentration in Chinese firms may be an alternative governance tool to reduce agency problems and enhance efficiency.

Hypothesis 3

The ownership concentration is positively related to firm performance.

Product market competition and firm performance

Theoretical models have argued that competition in product markets is a powerful force for overcoming the agency problem between shareholders and managers [ 78 ]. Competition in product markets plays the role of a takeover [ 3 ], and well-managed firms take over the market from poorly managed firms. According to this study finding, competition helps to build the best management team. Competition acts as a substitute for internal governance mechanisms, practically the market for corporate control [ 3 ]. Chou et al. [ 18 ] provided evidence that product market competition has a substantial impact on corporate governance and that it substitutes for corporate governance quality, and they provide evidence that the disciplinary force of competition on the management of the firm is from the fear of insolvency. For instance, Ibrahim [ 39 ] reported firms to operate in competitive industries record more returns of share compared with the concentrated industries. Hart [ 33 ] stated that competition inspires managers to work harder and, thus, reduces managerial slack. This study suggests that in high competition, the selling prices of products or services are more likely to fall because managers are concerned with their economic interest, which may tie up with firm performance. Managers are more focused on enhancing productivity that is more likely to reduce cost and increase firm performance. Thus, competition in product market can reduce agency problems between owners and managers and can enhance performance.

Hypothesis 4

Product market competition is positively associated with firm performance.

Debt financing and firm performance

Debt financing is one of the important governance mechanisms in aligning the incentives of corporate managers with those of shareholders. According to agency theory, debt financing can increase the level of monitoring over self-serving managers and that can be used as an alternative corporate governance mechanism [ 40 ]. This theory argues two ways through debt finance can minimize the agency cost: first the potential positive impact of debt comes from the discipline imposed by the obligation to continually earn sufficient cash to meet the principal and interest payment. It is a commitment device for executives. Second leverage reduces free cash flows available for managers’ discretionary expenses. Literature suggests that when leverage increases, managers may invest in high-risk projects in order to meet interest payments; this action leads lenders to monitor more closely the manager’s action and decision to reduce the agency cost. Koke and Renneboog [ 48 ] have found empirical support that a positive impact of bank debt on productivity growth in German firms. Also, studies like [ 77 , 86 ] examine empirically the effect of debt on firm investment decisions and firm value; reveal that debt finance is a negative effect on corporate investment and firm values [ 69 ] find that there is a significant and negative relationship between debt intensity and firm productivity in the case of Indian firms.

In the Chinese financial sectors, banks play a great role and use more commercial judgment and consideration in their leading decision, and even they monitor corporate activities [ 82 ]. In China listed company [ 77 , 82 ] found that an increase in bank loans increases the size of managerial perks and free cash flows and decreases corporate efficiency, especially in state control firms. The main source of debts is state-owned banks for Chinese listed companies [ 82 ]. This shows debt financing can act as a governance mechanism in limiting managers’ misuse of resources, thus reducing agency costs and enhance firm values. However, in China still government plays a great role in public listed company management, and most banks in China are also governed by the central government. However, the government is both a creditor and a debtor, especially in state-controlled firms. Meanwhile, the government as the owner has multiple objectives such as social welfare and some national (political) issues. Therefore, when such an issue is considerable, debt financing may not properly play its governance role in Chinese listed firms.

Hypothesis 5

Debt financing has a negative association with firm performance

Influence of managerial overconfidence on the relationship of corporate governance and firm performance

Corporate governance mechanisms are assumed to be an appropriate solution to solve agency problems that may derive from the potential conflict of interest between managers and officers, on the one hand, and shareholders, on the other hand [ 42 ].

Overconfidence is an overestimation of one’s own abilities and outcomes related to one’s own personal situation [ 74 ]. This study proposed from the behavioral finance view that overconfidence is typical irrational behavior and that a corporate manager tends to show it when they make business decisions. Overconfident CEOs tend to think they have more accurate knowledge about future events than they have and that they are more likely to experience favorable future outcomes than they are [ 35 ]. Behavioral finance theory incorporates managerial psychological biases and emotions into their decision-making process. This approach assumes that managers are not fully rational. Concurrently, several reasons in the literature show managerial irrationality. This means that the observed distortions in CG decisions are not only the result of traditional factors. Even with the absence of agency conflicts and asymmetric information problems, there is evidence documented for distortions such as the case of corporate investment. Managers will over- or under-invest regarding their optimism level and the availability of internal cash flow. Such a result push managers to make sub-optimal decisions and increase observed corporate distortions as a result. The view of behavioral decision theory [ 94 ] suggests that overconfidence, as one type of cognitive bias, encourages decision-makers to overestimate their own information and problem-solving capabilities and underestimates the uncertainties facing their firms and the potential losses from proceedings related with maintains against them.

Researchers [ 34 ,  61 ] discussed the managerial behavioral bias has a great impact on firm corporate governance practices. These studies carefully analyzed and clarified that managerial overconfidence is a major source of corporate distortions and suggested good CG practices can mitigate such problems.

In line with the above argument and empirical evidence of several researchers, therefore, the current study tried to investigate how the managerial behavioral bias (overconfidence) positively or negatively influences the effect of CG on firm performance using Chinese listed firms.

The boards of directors as central internal CG mechanisms have the responsibility to monitor, control, and supervise the managerial activities of firms. Thus, the board of directors has the responsibility to monitor and initiate managers in the company to increase the wealth of ownership and firm value. The capability of the board composition and diversity may be important to control and monitor the internal managers' based on the nature of internal executives behaviors, managerial behavior bias that may hinder or smooth the progress of corporate decisions of the board of directors. Accordingly, several studies suggested different arguments; Delton et al. [ 20 ] argued managerial behavior is influencing the allocation of board attention to monitoring. According to this argument, board of directors or concentrated ownership is not activated all the time continuously, and board members do not keep up a constant level of attention to supervise CEOs. They execute their activities according to firm and CEO status. While the current performance of the firm desirable the success confers celebrity status on CEOs and board will be liable to trust the CEOs and became idle. In other ways, overconfidence managers are irrational behaviors that tend to consider themselves better than others on different attributes. They do not always form beliefs logically [ 73 ]. They blame the external advice and supervision, due to overestimating their skills and abilities, underestimate their risks [ 61 ]. Similarly, CEOs are the most decision-makers in the firm strategies. While managers are highly overconfident, board members (especially external) face information limitations on a day-to-day activities of internal managers. In other way, CEOs have a strong aspiration to increase the performance of their firm; however, if they achieve their goals, they may build their empire. This situation will pronounce where the market for corporate control is not matured enough like China [ 27 ]. So, this fact affects the effectiveness of board activities in strategic decision-making. In contrast, as the study [ 7 ] indicated, as the number of the internal board increases, the impact of managerial overconfidence in the firm became increasing and positively correlated with the leadership duality. In other ways, agency theory, many opponents suggest that CEO duality reduces the monitoring role of the board of directors over the executive manager, and this, in turn, may harm corporate performance. In line with this Khajavi and Dehghani, [ 44 ] found that as the number of internal board increases, the managerial overconfidence bias will increase in Tehran Stock Exchange during 2006–2012.

This shows us the controlling and supervising role of independent directors are less likely in the firms managed by overconfident managers than normal managers; conversely, the power of CEO duality is more salient in the case of overconfident managers than normal managers.

Hypothesis 2a

Managerial overconfidence negatively influences the relationship of independent board and firm performance.

Hypothesis 2b

Managerial overconfidence strengthens the negative relationships of CEO duality and firm performance.

An internal control mechanism ownership concentration believes in the existence of strong control against the managers’ decisions and choices. Ownership concentration can reduce managerial behaviors such as overconfidence and optimism since it contributes to the installation of a powerful control system [ 7 ]. They documented that managerial behavior affects the monitoring activities of ownership concentration on firm performance. Ownership can affect the managerial behavioral bias in different ways, for instance, when CEOs of the firm become overconfident for a certain time, the block ownership controlling attention is weakened [ 20 ], and owners trust the internal managers that may damage the performance of the firms in an emerging market where external market control is weak. Overconfidence CEOs have the quality that expresses their behavior up on their company [ 36 ]. In line with this fact, the researcher can predict that the impact of concentrated ownership on firm performance is affected by overconfident managers.

Hypothesis 2c

Managerial overconfidence negatively influences the impact of ownership concentration on firm performance.

Theoretical literature has argued that product market competition forces management to improve firm performance and to make the best decisions for the future. In high competition, managers try their best due to fear of takeover [ 3 ], well-managed firms take over the market from poorly managed firms, and thus, competition helps to build the best management team. In the case of firms operating in the competitive industry, overconfidence CEO has advantages, due to its too simple to motivate overconfident managerial behaviors due to being overconfident managers assume his/her selves better than others. Overconfident CEOs are better at investing for future investments like research and development, so it plays a strategic role in the competition. Englmaier [ 23 ] argues firms in a more competitive industry better hire a manager who strongly believes in better future market outcomes.

Therefore, the following hypothesis was proposed:

Hypothesis 2d

Managerial overconfidence moderates the effect of product market competition on firm performance.

Regarding debt financing, existing empirical evidence shows no specific pattern in the relation of managerial overconfidence and debt finance. Huang et al. [ 38 ] noted that overconfident managers normally overestimate the profitability of investment projects and underestimate the related risks. So, this study believes that firms with overconfident managers will have lower debt. Then, creditors refuse to provide debt finance when firms are facing high liquidity risks. Abdullah [ 1 ] also argues that debt financers may refuse to provide debt when a firm is having a low credit rating. Low credit rating occurs when bankers believe firms are overestimating the investment projects. Therefore, creditors may refuse to provide debt when managers are overconfident, due to under-estimating the related risk which provides a low credit rating.

However, in China, the main source of debt financers for companies is state banks [ 82 ], and most overconfidence CEOs in Chinese firms have political connections [ 96 ] with the state and have a better relationship with external financial institutions and public banks. Hence, overconfident managers have better in accessing debt rather than rational managers in the context of China that leads creditors to allow to follow and influence the firm investments through collecting information about the firm and supervise the firms directly or indirectly. Thus, managerial overconfidence could have a positive influence on relationships between debt finance and firm performance; thus, the following hypothesis is proposed:

Hypothesis 2e

Managerial overconfidence moderates the relationship between debt financing and firm performance.

To explore the impact of CG on firm performance and whether managerial behavior (managerial overconfidence) influences the relationships of CG and firm performance, the following research model framework was developed based on theoretical suggestions and empirical evidence.

Data sources and sample selection

The data for this study required are accessible from different sources of secondary data, namely China Stock Market and Accounting Research (CSMAR) database and firm annual reports. The original data are obtained from the CSMAR, and the data are collected manually to supplement the missing value. CSMAR database is designed and developed by the China Accounting and Financial Research Center (CAFC) of Honk Kong Polytechnic University and by Shenzhen GTA Information Technology Limited company. All listed companies (Shanghai and Shenzhen stock Exchange) financial statements are included in this database from 1990 and 1991, respectively. All financial data, firm profile data, ownership structure, board structure, composition data of listed companies are included in the CSMAR database. The research employed nine consecutive years from 2010 to 2018 that met the condition that financial statements are available from the CSMAR database. This study sample was limited to only listed firms on the stock market, due to hard to access reliable financial and corporate governance data of unlisted firms. All data collected from Chinese listed firms only issued on A shares in domestic stoke market exchange of Shanghai and Shenzhen. The researcher also used only non-financial listed firms’ because financial firms have special regulations. The study sample data were unbalanced panel data for nine consecutive years from 2010 to 2018. To match firms with industries, we require firms with non-missing CSRC top-level industry codes in the CSMAR database. After applying all the above criteria, the study's final observations are 11,634 firm-year observations.

Measurement of variables

Dependent variable.

  • Firm performance

To measure firm performance, prior studies have been used different proxies, by classifying them into two groups: accounting-based and market-based performance measures. Accordingly, this study measures firm performance in terms of accounting base (return on asset) and market-based measures (Tobin’s Q). The ROA is measured as the ratio of net income or operating benefit before depreciation and provisions to total assets, while Tobin’s Q is measured as the sum of the market value of equity and book value of debt, divided by book value of assets.

Independent Variables

Board independent (bind).

Independent is calculated as the ratio of the number of independent directors divided by the total number of directors on boards. In the case of the Chinese Security Regulatory Commission (2002), independent directors are defined as the “directors who hold no position in the company other than the position of director, and no maintain relation with the listed company and its major shareholders that might prevent them from making objective judgment independently.” In line with this definition, many previous studies used a proportion of independent directors to measure board independence [ 56 , 79 ].

CEO Duality

CEO duality refers to a position where the same person serves the role of chief executive officer of the form and as the chairperson of the board. CEO duality is a dummy variable, which equals 1 if the CEO is also the chairman of the board of directors, and 0 otherwise.

Ownership concentration (OWCON)

The most common way to measure ownership concentration is in terms of the percentage of shareholdings held by shareholders. The percentage of shares is usually calculated as each shareholder’s shareholdings held in the total outstanding shares of a company either by volume or by value in a stock exchange. Thus, the distribution of control power can be measured by calculating the ownership concentration indices, which are used to measure the degree of control or the power of influence in corporations [ 88 ]. These indices are calculated based on the percentages of a number of top shareholders’ shareholdings in a company, usually the top ten or twenty shareholders. Following the previous studies [ 22 ], Wei Hu et al. [ 37 ], ownership concentration is measured through the total percentage of the 10 top block holders' ownership.

Product market competition (PMC)

Previous studies measure it through different methods, such as market concentration, product substitutability and market size. Following the previous work in developed and emerging markets [product substitutability [ 31 , 57 ], the current study measured using proxies of market concentration (Herfindahl–Hirschman Index (HHI)). The market share of every firm is calculated by dividing the firm's net sale by the total net sale of the industry, which is calculated for each industry separately every year. This index measures the degree of concentration by industry. The bigger this index is, the more the concentration and the less the competition in that industry will be, vice versa.

Debt Financing (DF)

The debt financing proxy in this study is measured by the percentage of a total asset over the total debt of the firm following the past studies [ 69 , 95 ].

Interaction variable

Managerial overconfidence (moc).

To measure MOC, several researchers attempt to use different proxies, for instance CEO’s shareholdings [ 61 ] and [ 46 ]; mass media comments [ 11 ], corporate earnings forecast [ 36 ], executive compensation [ 38 ], and managers individual characteristics index [ 53 ]. Among these, the researcher decided to follow a study conducted in emerging markets [ 55 ] and used corporate earnings forecasts as a better indicator of managerial overconfidence. If a company’s actual earnings are lower than the earnings expected by managers, the managers are defined as overconfident with a dummy variable of (1), and as not overconfident (0) otherwise.

Control variables

The study contains three control variables: firm size, firm age, and firm growth opportunities. Firm size is an important component while dealing with firm performance because larger firms have more agency issues and need strong CG. Many studies confirmed that a large firm has a large board of directors, which increases the monitoring costs and affects a firm’s value (Choi et al., 2007). In other ways, large firms are easier to generate funds internally and to gain access to funds from an external source. Therefore, firm size affects the performance of firms. Firm size can be measured in many ways; common measures are market capitalization, revenue volume, number of employments, and size of total assets. In this study, firm size is measured by the logarithm of total assets following a previous study. Firm age is the number of years that a firm has operated; it was calculated from the time that the company first appeared on the Chinese exchange. It indicates how long a firm in the market and indicates firms with long age have long history accumulate experience and this may help them to incur better performance [ 8 ]. Firm age is a measure of a natural logarithm of the number of years listed from the time that company first listed on the Chinese exchange market. Growth opportunity is measured as the ratio of current year sales minus prior year sales divided by prior year sales. Sales growth enhances the capacity utilization rate, which spreads fixed costs over revenue resulting in higher profitability [ 49 ].

Data analysis methods

Empirical model estimations.

Most of the previous corporate governance studies used OLS, FE, or RE estimation methods. However, these estimations are better when the explanatory variables are exogenous. Otherwise, a system generalized moment method (GMM) approach is more efficient and consistent. Arellano and Bond [ 4 ] suggested that system GMM is a better estimation method to address the problem of autocorrelation and unobservable fixed effect problems for the dynamic panel data. Therefore, to test the endogeneity issue in the model, the Durbin–Wu–Hausman test was applied. The result of the Hausman test indicated that the null hypothesis was rejected ( p  = 000), so there was an endogeneity problem among the study variables. Therefore, OLS and fixed effects approaches could not provide unbiased estimations, and the GMM model was utilized.

The system GMM is the econometric analysis of dynamic economic relationships in panel data, meaning the economic relationships in which variables adjust over time. Econometric analysis of dynamic panel data means that researchers observe many different individuals over time. A typical characteristic of such dynamic panel data is a large observation, small-time, i.e., that there are many observed individuals, but few observations over time. This is because the bias raised in the dynamic panel model could be small when time becomes large [ 75 ]. GMM is considered more appropriate to estimate panel data because it removes the contamination through an identified finite-sample corrected set of equations, which are robust to panel-specific autocorrelation and heteroscedasticity [ 12 ]. It is also a useful estimation tool to tackle the endogeneity and fixed-effect problems [ 4 ].

A dynamic panel data model is written as follows:

where y it is the current year firm performance, α is representing the constant, y it−1 is the one-year lag performance, i is the individual firms, and t is periods. β is a vector of independent variable. X is the independent variable. The error terms contain two components, the fixed effect μi and idiosyncratic shocks v it .

Accordingly, to test the impact of corporate governance mechanisms on firm performance and influencing role of the overconfident executive on the relationship between corporate governance mechanisms and firm performance, the following base models were used:

ROA / TQ i ,t  =  α  + yROA /TQ i,t−1  + β 1 INDBRD + β 2 DUAL + β 3 OWCON +  β 4 DF +  β 5 PMC +  β 6 MOC +  β 7 FSIZE + β 8 FAGE + β 9 SGTH + β 10–14 MOC * (INDBRD, DUAL, OWCON, DF, and PMC) + year dummies + industry Dummies + ή +  Ɛ it .

where i and t represent firm i at time t, respectively, α represents the constant, and β 1-9 is the slope of the independent and control variables which reflects a partial or prediction for the value of dependent variable, ή represents the unobserved time-invariant firm effects, and Ɛ it is a random error term.

Descriptive statistics

Descriptive statistics of all variables included in the model are described in Table 1 . Accordingly, the value of ROA ranges from −0.17 to 0.23, and the average value of ROA of the sample is 0.05 (5.4%). Tobin Q’s value ranges from 0.88 to 10.06, with an average value of 2.62. The ratio of the independent board ranges from 0.33 to 0.57. The average value of the independent board of directors’ ratio was 0.374. The proportion of the CEO serving as chairperson of the board is 0.292 or 29.23% over the nine years. Top 10 ownership concentration of the study ranged from 22.59% to 90.3%, and the mean value is 58.71%. Product market competition ranges from 0.85% to 40.5%, with a mean value of 5.63%. The debt financing also has a mean value of 40.5%, with a minimum value of 4.90% and a maximum value of 87%. The mean value of managerial overconfidence is 0.589, which indicates more than 50% of Chinese top managers are overconfident.

The study sample has an average of 22.15 million RMB in total book assets with the smallest firms asset 20 million RMB and the biggest owned 26 million RMB. Study sample average firms’ age was 8.61 years old. The growth opportunities of sample firms have an average value of 9.8%.

Table 2 presents the correlation matrix among variables in the regression analysis in the study. As a basic check for multicollinearity, a correlation of 0.7 or higher in absolute value may indicate a multicollinearity issue [ 32 ]. According to Table 2 results, there is no multicollinearity problem among variables. Additionally, the variance inflation factor (VIF) test also shows all explanatory variables are below the threshold value of 10, [ 32 ] which indicates that no multicollinearity issue exists.

Main results and discussion

Impact of cg on firm performance.

Accordingly, Tables 3 and 4 indicate the results of two-step system GMM employing the xtabond2 command introduced by Roodman [ 75 ]. In this, the two-step system GMM results indicated the CG and performance relationship, with the interaction of managerial overconfidence. One-year lag of performance has been included in the model and two to three periods lagged independent variables were used  as an instrument in the dynamic model, to correct for simultaneity, control for the fixed effect, and to tackle the endogeneity problem of independent variables. In this model, all variables are taken as endogenous except control variables.

Tables 3 and 4 report the results of three model specification tests to determine whether an appropriate estimation model was applied. These tests are: 1) the Arellano–Bond test for the first-order (AR (1)) and second-order correlation (AR (2)). This test indicates the result of AR (1) and AR (2) is tested for the first-order and second-order serial correlation in the first-differenced residuals, AR (2) test accepted under the null of no serial correlation. The model results show AR (2) test yields a p-value of 0.511 and 0.334, respectively, for ROA and TQ firm performance measurement, which indicates that the models cannot reject the null hypothesis of no second-order serial correlation. 2) Hansen test over-identification is to detect the validity of the instrument in the models. The Hansen test of over-identification is accepted under the null that all instruments are valid. Tables 3 and 4 indicate the p-value of Hansen test over-identification 0.139 and 0.132 for ROA and TQ measurement of firm performance, respectively, so that these models cannot reject the hypothesis of the validity of instruments. 3) In the difference-in-Hansen test of exogeneity, it is acceptable under the null that instruments used for the equations in levels are exogenous. Table 3 shows p-values of 0.313 and 0.151, respectively, for ROA and TQ. These two models cannot reject the hypothesis that the equations in levels are exogenous.

Tables 3 and 4 report the results of the one-year lag values of ROA and TQ are positive (0.398, 0.658) and significant at less than 1% level. This indicates that the previous year's performance of a Chinese firm has a significant impact on the current firm's performance. This study finding is consistent with the previous studies: Shao [ 79 ], Nguyen [ 66 ] and Wintoki et al. [ 89 ], which considered previous year performance as one of the significant independent variables in the case of corporate governance mechanisms and firm performance relationships.

The results indicate board independence has no relation with firm performance measured by ROA and TQ. However, hypothesis 1 indicated that there is a positive and significant relationship between independent board and firm performance, which is not supported. The results are conflicting with the assumption that high independent board on board room should better supervise managers, alleviate the information asymmetry between agents and owners, and improve the firm performance by their proficiency. This result is consistent with several previous studies [ 56 , 79 ], which confirms no relation between board independence and firm performance.

This result is consistent with the argument that those outside directors are inefficient because of the lack of enough information concerning the daily activities of internal managers. Specifically, Chinese listed companies may simply include the minimum number of independent directors on board to fulfill the institutional requirement and that independent boards are only obligatory and fail to perform their responsibilities [ 56 , 79 ]. In this study sample, the average of independent board of all firms included in this study has only 37 percent, and this is one of concurrent evidence as to the independent board in Chinese listed firm simple assigned to fulfill the institutional obligation of one-third ratio.

CEO duality has a negative significant relationship with firm performance measured by TQ ( β  = 0.103, p  < 0.000), but has no significant relationship with accounting-based firm performance (ROA). Therefore, this result supports our hypothesis 2, which proposed there is a negative relationship between dual leadership and firm performance. This finding is also in line with the agency theory assumption that suggests CEO duality could reduce the board’s effectiveness of its monitoring functions, leading to further agency problems and ultimately leads poor firm performance [ 41 , 83 ]. This finding consistent with prior studies [ 15 , 56 ] that indicated a negative relationship between CEO dual and firm performance, against to this result the studies [ 70 ] and [ 15 ] found that duality positively related to firm performance.

Hypothesis 3 is supported, which proposes there is a positive relationship between ownership concentration and firm performance. Table 3 result shows that there is a positive and significant relationship between the top ten concentrated ownership and ROA and TQ (0.00046 & 0.06) at 1% and 5% significance level, respectively. These findings are consistent with agency theory, which suggests that the shareholders who hold large ownership alleviate agency costs and information problems, monitor managers effectively, consequently enhance firm performance [ 81 ]. This finding is in line with Wu and Cui [ 90 ], and Pant et al. [ 69 ]. Concentrated shareholders have a strong encouragement to watch strictly over management, making sure that management does not engage in activities that are damaging to the wealth of shareholders [ 80 ].

The result indicated in Table 3 PMC and firm performance (ROA) relationship was positive, but statistically insignificant. However, PMC has positive ( β  = 2.777) and significant relationships with TQ’s at 1% significance level. Therefore, this result does not support hypothesis 4, which predicts product market competition has a positive relationship with firm performance in Chinese listed firms. In this study, PMC is measured by the percentage of market concentration, and a highly concentrated product market means less competition. Though this finding shows high product market concentration positively contributed to market-based firm performance, this result is consistent with the previous study; Liu et al. [ 57 ] reported high product market competition associated with poor firm performance measured by TQ in Chinese listed firms. The study finding is against the theoretical model argument that competition in product markets is a powerful force for overcoming the agency problem between shareholders and managers, and enhances better firm performance (Scharfstein and [ 78 ]).

Regarding debt finance and firm performance relationship, the impact of debt finance was found to be negative on both firm performances as expected. Thus, this hypothesis is supported. Table 3 shows a negative relationship with both firm performance measurements (0.059 and 0.712) at 1% and 5% significance level. Thus, hypothesis 5, which predicts a negative relationship between debt financing and firm performance, has been supported. This finding is consistent with studies ([ 86 ]; Pant et al., [ 69 ]; [ 77 , 82 ]) that noted that debt financing has a negative effect on firm values.

This could be explained by the fact that as debt financing increases in external loans, the size of managerial perks and free cash flows increase and corporate efficiency decrease. In another way, because the main source of debt financers is state-owned banks for Chinese listed firms, these banks are mostly governed by the government, and meanwhile, the government as the owner has multiple objectives such as social welfare and some national issues. Therefore, debt financing fails to play its governance role in Chinese listed firms.

Regarding control variables, firm age has a positive and significant relationship with both TQ and ROA. This finding supported by the notion indicates firms with long age have long history accumulate experience, and this may help them to incur better performance (Boone et al. [ 8 ]). Firm size has a significant positive relationship with firm performance ROA and negative significant relation with TQ. The positive result supported the suggestion that large firms get a higher market valuation from the markets, while the negative finding indicates large firms are more complex; they may have several agency problems and need additional monitoring, which results in higher operating costs [ 84 ]. Growth opportunity was found to be in positive and significant association with ROA; this indicates that a firm high growth opportunity can increase its performance.

Influences of managerial overconfidence in the relationship between CG measures and firm performance

It predicts that managerial overconfidence negatively influences the relationship of independent board and firm performance. The study findings indicate a negative significant influence of managerial overconfidence when the firm is measure by Tobin’s Q ( β  = −4.624, p  < 0.10), but a negative relationship is insignificant when the firm is measured by ROA. Therefore, hypothesis 2a is supported when firm value is measured by TQ. This indicates that the independent directors in Chinese firms are not strong enough to monitor internal CEOs properly, due to most Chinese firms merely include the minimum number of independent directors on a board to meet the institutional requirement and that independent directors on boards are only perfunctory. Therefore, the impact of independent board on internal directors is very weak, in this situation overconfident CEO becoming more powerful than others, and they can enact their own will and avoid compromises with the external board or independent board. In another way, the weakness of independent board monitoring ability allows CEOs overconfident that may damage firm value.

The interaction of managerial overconfidence and CEO duality has a significant negative effect on operational firm performance (0.0202, p  > 0.05) and a negative insignificant effect on TQ. Thus, Hypothesis 2b predicts that the existence of overconfident managers strengthens the negative relationships of dual leadership and firm performance has been supported. This finding indicates the negative effect of CEO duality amplified when interacting with overconfident CEOs. According to Legendre et al. [ 51 ], argument misbehaviors of chief executive officers affect the effectiveness of external directors and strengthen the internal CEO's power. When the CEOs are getting more powerful, boards will be inefficient and this situation will result in poor performance, due to high agency problems created between managers and ownerships.

Hypothesis 2c is supported

It predicts the managerial overconfidence decreases the positive impact of ownership concentration on firm performance. The results of Tables 3 and 4 indicated that the interaction effect of managerial overconfidence with concentrated ownership has a negative significant impact on both ROA and TQ firm performance (0.000404 and 0.0156, respectively). This finding is supported by the suggestion that CEO overconfidence weakens the monitoring and controlling role of concentrated shareholders. This finding is explained by the fact that when CEOs of the firm become overconfident for a certain time, the concentrated ownership controlling attention is weakened [ 20 ], owners trust the internal managers that may damage the performance of the firms in an emerging market where external market control is weak. Overconfident managers gain much more power than rational managers that they are able to use the firm to further their own interests rather than the interests of shareholders and managerial overconfidence is a behavioral biased that managers follow to meet their goals and reduce the wealth of shareholders. This situation resulted in increasing agency costs in the firm and damages the firm profitability over time.

It predicts that managerial overconfidence moderates the relation of product market competition and firm performance. However, the result indicated there is no significant moderating role of managerial overconfidence in the relationship between product market competition and firm performance in Chinese listed firms.

It proposed that overconfidence managers moderate the relationship of debt financing and performance in Chinese listed firm: The study finding is unobvious; it negatively influenced the relation of debt financing with accounting-based firm performance measure ( β  = −0.059, p  < 0.01) and positively significant market base firm performance ( β  = 0.735, p  < 0.05). The negative interaction results could be explained by the fact that overconfident leads managers to have lower debt due to overestimate the profitability of investment projects and underestimate the related risks. This finding is consistent with [ 38 ] finding that overconfident CEOs have lower debt, because of overestimating the investment projects. In another perspective, the result indicated a positive moderating role of overconfidence managers in the relationship of debt financing and market-based firm performance. This result is also supported by the suggestion that overconfident managers have better in accessing debt rather than rational managers in the context of China because in Chinese listed firms most of the senior CEOs have a better connection with the external finance institutions and state banks to access debt, due to their political participation than rational managers.

The main objectives of the study were to examine the impact of basic corporate governance mechanisms on firm performance and to explore the influence of managerial overconfidence on the relationship of CGMs and firm performance using Chinese listed firms. The study incorporated different important internal and external corporate governance control mechanisms that can affect firm performance, based on different theoretical assumptions and literature. To address these objectives, many hypotheses were developed and explained by a proposing multi-theoretical approach.

The study makes several important contributions to the literature. While several kinds of research have been conducted on the relationships of corporate governance and firm performance, the study basically extends previous researches based on panel data of emerging markets. Several studies have investigated in developed economies. Thus, this study contributed to the emerging market by providing comprehensive empirical evidence to the corporate governance literature using unique characteristics of Chinese publicity listed firms covering nine years (2010–2018). The study also extends the developing stream of corporate governance and firm performance literature in emerging economies that most studies in emerging (Chinese) listed companies give less attention to the external governance mechanisms. External corporate governance mechanisms like product market competition and debt financing are limited from emerging market CG literature; therefore, this study provided comprehensive empirical evidence.

Furthermore, this study briefly indicated how managerial behavioral bias can influence the monitoring, controlling, and corporate decisions of corporate firms in Chinese listed firms. Therefore, as to the best knowledge of the researcher, no study investigated the interaction effect of managerial overconfidence and CG measures to influence firm performance. Thus, the current study provides an insight into how a managerial behavioral bias (overconfidence) influences/moderates the relationship between corporate governance mechanisms and firm performance, in an emerging market. Hence, the study will help managers and owners in which situation managerial behavior helps more for firm’s value and protecting shareholders' wealth (Fig. 1 ).

Generally, the previous findings also support the current study's overall findings: Phua et al. [ 71 ] concluded that managerial overconfidence can significantly affect corporate activities and outcomes. Russo and Schoemaker [ 76 ] found that there is opposite relationship between overconfidence managers and quality of decision making, because overconfident behavioral bias reduces the ability to make a rational decision. Therefore, the primary conclusion of the study is that it attempts to understand the strength of the effect of corporate governance mechanisms on firm performance, and managerial behavioral bias must be taken into consideration as one of the influential moderators.

figure 1

Proposed research model framework

Availability of data and material

I declare that all data and materials are available.

Abbreviations

China accounting and finance center

Chief executive officer

  • Corporate governance

Corporate governance mechanisms

China Stock Market and Accounting Research

China Securities Regulatory Commission

Generalized method of moments

  • Managerial overconfidence

Research and development

Return on asset

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Guluma, T.F. The impact of corporate governance measures on firm performance: the influences of managerial overconfidence. Futur Bus J 7 , 50 (2021). https://doi.org/10.1186/s43093-021-00093-6

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Essays on corporate governance and firm performance

Guo, Ran (2020) Essays on corporate governance and firm performance. PhD thesis, UNSPECIFIED.

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This thesis contains two studies that examine the interaction between corporate governance and firm performance. In the first study, I examine whether board friendliness reduces crash risk. I measure friendliness by the Political Homophily Index (PHI), which captures the similarity of political orientations of managers and directors. We find that firms’ crash risk decreases in political homophily. The results are robust when we instrument the change in PHI by the change in local political homogeneity. Our results suggest that better alignment in political orientations facilitates information sharing, including information on bad outcomes in a timely manner. The effect is more pronounced when firms have stronger corporate governance mechanisms and directors have a stronger incentive to acquire information. In the second study, I examine how the use of relative performance evaluation (RPE) affects industry competition. Using data from the U.S. airline industry, we estimate a dynamic game of competition with heterogeneous firms in an oligopolistic market with the presence of RPE contracts. As is standard, RPE makes CEO compensation less sensitive to market conditions. Therefore, the CEO’s propensity to operate in a given market is determined by a trade-off that arises between the reduction in compensation based on market conditions and the gain from being compared to competing agents. The estimation results show that the use of RPE decreases a firm’s tendency to be active under bad market conditions by 10.1%. Conversely, the tendency to be active rises in good market conditions by 12.4%. These effects are stronger for firms with lower fixed operating costs.

SME corporate governance: a literature review of informal mechanisms for governance

Meditari Accountancy Research

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This paper takes a structured literature review (SLR) approach to identify gaps in the literature and suggest future research opportunities. It focuses on corporate governance (CG) performed outside the formal board of directors’ structure and examines research of alternative CG of small and medium-sized entities (SMEs).

Design/methodology/approach

The authors use the SLR method to search the Scopus database, extracting and synthesising findings relating specifically to SMEs’ CG. These are tabulated and described using bibliometric software.

The authors highlight an absence of tailored theoretical approaches to understanding CG in SMEs, which differs from the governance of larger entities. They also find evidence of alternative governance structures in SME CG.

Research limitations/implications

Further research should embrace management and other theoretical perspectives and expanded methodologies, nuances in understanding offered in contextualised settings and awareness of practical implications to better understand the specific setting of CG in SMEs.

Practical implications

SMEs seek to access the scarce resources and skills external to their formal CG structures. Regulators and resource providers should mobilise facilitation and training for this expansion.

Originality/value

The authors synthesise a large body of literature to extract findings specific to SMEs. A unique contribution is our focus on alternative forms of CG in SMEs. Evidence of alternative boards points to resolutions for human capital shortages in SMEs.

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  • Resource-led structures
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Handley, K. and Molloy, C. (2022), "SME corporate governance: a literature review of informal mechanisms for governance", Meditari Accountancy Research , Vol. 30 No. 7, pp. 310-333. https://doi.org/10.1108/MEDAR-06-2021-1321

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Copyright © 2022, Karen Handley and Courtney Molloy.

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1. Introduction

Small to medium enterprises (SMEs) are critical to the health of the economy, contributing disproportionately to job creation ( Decker et al. , 2014 ) and providing a source of innovation and growth ( Triguero et al. , 2014 ). Translating slower growing SMEs into high growth SMEs should be the goal of governments worldwide, particularly in developing economies. Prior studies suggest that high-growth SMEs rely on individual learning, where “outsourcing and alliances with large established partners enable small firms to increase sales revenue through access to well-resourced innovation processes, industry networks and wider markets” ( Dwyer and Kotey, 2016 , p. 463). This has been particularly difficult to achieve during the COVID-19 pandemic ( Morgan et al. , 2020 ), given isolation and social distancing ( Kraus et al. , 2020 ). Company boards of directors or supervisory boards ( Faghfouri et al. , 2015 ) can guide organisations during times of crisis. Barroso-Castro et al. (2020) argue that SME growth is directly related to decisions influenced by corporate governance (CG) and directors’ characteristics; however, few small businesses have skilled boards ( Berenguer et al. , 2016 ; Wielemaker and Gedajlovic, 2011 ) and, overall, we know relatively little about the various mechanisms through which SMEs access the resources typically afforded by a board ( Audretsch and Lehmann, 2014 ; Claessens and Yurtoglu, 2012 ).

Our study builds on the important foundations formed by prior reviews of CG which have highlighted its role in innovation ( Asensio-López et al. , 2019 ), entrepreneurial firms ( Li et al. , 2020 ) and corporate social responsibility (CSR) ( Dwekat et al. , 2021 ). Although providing a helpful start, these reviews focus mainly on larger entities and fail to acknowledge the specific characteristics and challenges of SMEs. Furthermore, academic research into CG of SMEs has typically focused on the role of boards, rather than “how” and “why” questions about SME governance ( Audretsch and Lehmann, 2014 ; Gnan et al. , 2015 ). Lack of consensus on the definition of CG adds to the challenge for studying this in SMEs. A broad definition extending CG past the limits of a board of directors is helpful in the SME context. For this reason, we adopt Gnan et al. ’s (2015 , p. 355) definition of a “governance system [being] a set of governance mechanisms – both individual and collective – in charge of directing and controlling an organization”.

Where research does address CG in SMEs, there is often failure to acknowledge that theories usually applied to larger entities, such as agency theory, do not operate as expected in SMEs where the traditional owner–manager divide is blurred ( Berenguer et al. , 2016 ; Randøy and Goel, 2003 ). Centralisation of ownership and management in some SMEs has implications for innovation and can result in information asymmetry between investors and management ( Mande et al. , 2011 ). Relatedly, Machold et al. (2011) argue that SMEs sometimes tend towards real-time entrepreneurship rather than managerialism, which has implications for the practices of CG in such a context. Work on the functioning of “business groups” ( Tajeddin and Carney, 2019 ) and informal partnerships implies that research has overlooked how SMEs collaborate to overcome resource challenges.

Given these gaps, this study explores the notion that the SME governance literature may be too narrow and does not allow for investigation of more innovative governance models suitable for SMEs. While boards determine strategic direction and can impact value creation, a lack of access to human capital in SMEs means they are unable to create sufficient skill diversity within their boards of directors ( Ruef et al. , 2003 ), which may need to be sourced outside of the company to facilitate growth ( Dwyer and Kotey, 2016 ). Saxena and Jagota (2015 , p. 55) call for “articulation of governance outside the firm” with a sociocratic model ( Saxena and Jagota, 2016 ) that holds the locus of governance in clusters, industry associations and development agencies.

The article contributes to an emerging narrative in the accounting practitioner literature and elsewhere points to the possibility of outsourcing this knowledge-work by creating alternative boards of directors or appointing “virtual” chief financial officer (CFOs) [ 1 ]. “Alternative” board skills are affordable for SMEs and address resource shortages. The literature uses a variety of names to refer to alternative governance structures: informal ( Estrin and Prevezer, 2010 ), venture capitalist ( Madill et al. , 2005 ), supervisory [ 2 ] ( Faghfouri et al. , 2015 ; Van Gils, 2005 ), business group ( Tajeddin and Carney, 2019 ), informal partnerships ( Moss et al. , 2021 ) or peer advisory boards. Company secretarial roles are already outsourced in this manner, with skilled advice offered by accounting firms [ 3 ]. These innovative ways of governing might be particularly important for SMEs, and this article synthesises and examines existing references to these to extract common findings and delineate important avenues for future research.

We respond to the challenge posed by Ebrahim et al. (2014 , p. 94) to “address governance issues in and around new forms of organizing” by first conducting a broad bibliometrics analysis ( Donthu et al. , 2021 ) of the SME governance literature to synthesise what we know about alternative CG from prior studies. Then, we use a structured literature review (SLR) approach ( Massaro et al. , 2016a ) to identify a subset of research on alternative forms of governance relating to SMEs. We contribute by describing this scattered body of literature, both graphically and in terms of the researcher cohort. We find evidence of the need to differentiate CG studies of SMEs, the lack of a cohesive theoretical framework for these studies and evidence of roles played in SME governance by people outside of the formal board of directors. The insights gained in the SLR suggest future research avenues, calling for a contextualised, theory-deriving exploration of CG, specifically in SMEs.

This paper proceeds as follows: Section 2 discusses the dual research methods. Section 3 discusses findings on the broader field of SME governance, and Section 4 focuses on those articles in the study that provide insights relating to alternative forms of governance in SMEs. In Section 5, we draw, discuss and support implications arising from the literature examined and suggest avenues for future research.

2. Research method

Does this research exist or is there an unexplored arena?

It also enables identification of possible theorisation to guide future developments in this area.

Then we adopt a more detailed SLR approach as identified in Massaro et al. (2016a ). We examine a unique set of 32 articles excluded from Method 1 to examine alternative governance more closely. SLR can be helpful to open “new and interesting research paths” while at the same time reducing “researcher bias” ( Massaro et al. , 2016a , p. 770). It allows for the utilisation of technology to access journal articles and is useful for niche research areas that require manual coding of data ( Donthu et al. , 2021 ). Here we use it in the absence of a wide body of research about alternative boards in SMEs to identify future research options. As we take a similar approach to an earlier review by Huse (2000) , the results can be compared. We follow the ten steps suggested by Massaro et al. (2016a ) for preparing an SLR, with Steps 1–8 discussed below, Step 9 in Section 4 of this paper and Step 10 in Section 5.

2.1 Literature review protocol

We developed a protocol to guide the research and define the research questions. We wanted to identify the location of evidence relating to the concept of outsourced, “virtual” or alternative governance structures. Initial boundaries were created by extracting the top governance journals from the Australian Business Deans Council (ABDC) list. We identified those with the terms “Board” and “Governance” in journal title, ranked either A or A* in the list (see Table 1 ).

We also identified the initial nodes for coding the journal articles based on previous SLR studies ( Massaro et al. , 2015 , 2016a , 2016b ), including authors and affiliations, country of research, research methods and implications for practitioners and policymakers. Then we added nodes based on other studies related to board structure, including Huse (2000) for the coding of the focus of the paper and the attributes of the board, and van den Heuvel et al. (2006) and Hung (1998) for the board role focus and theoretical perspective nodes. Finally, we added additional implications to allow identification of specifics relating to outsourcing, innovation and SMEs. See Table 2 and the discussion in Section 4.

2.2 Research questions

How is the CG literature developing with respect to alternative governance in SMEs?

What is the focus of the CG literature particularly relating to alternative governance in the SME sector?

What is the future of CG research regarding alternative governance in SMEs?

2.3 Scope of studies or journal selection, impact evaluation and literature search

To justify our choice of journals, we performed a search for the top 20 cited articles within the Business and Economics subject areas on Scopus using the search terms: Title, Abstract, Keywords in (“SME*” OR “Small and Med*” OR “Small or Med*”, “Board*”) AND (“Governanc*” OR “Virtual*” OR “Outsourc* Board*” OR “director*” OR “Advisory”) AND Subject Area limited to (“BUSI” OR “ECON”). See Table 3 for the search results.

Only 4 of the top 20 cited articles on the list in Table 4 are sourced from the journals on our ABDC list. We then expanded our search both backwards (i.e. via references) and forwards (i.e. via citations) and into lesser ranked journals (see Section 4.3). We extracted the journals cited in the top 20 article reference lists and tallied the number of times each journal was referenced ( Table 4 ). Positing that the conversation about alternative boards would include all articles that cited the top 20, we compiled the list and counts in Table 5 . Tables 4 and 5 also include the average SCImago ranking, the ABDC ranking and the H-index for each of these journals for 2018–2020.

Seven journals appear in both citation and reference searches. The rankings in Table 4 highlight that the references come from mostly A or A* ABDC journals, while the forward citations are more broadly dispersed. This reflects common academic practice to cite the “top” papers in a field – duplicated in our study by our starting point of the ABDC list in Table 3 . We observe that the recommended SLR practice of concentrating on quality journals may result in missing the conversation altogether.

Our final search field of 20 journals in the final list of 20 journals in the study includes an amalgam of the reference and citations journals selecting the top 11 of each.

Academy of Management Journal.

Academy of Management Review.

Administrative Science Quarterly.

Corporate Governance.

Corporate Governance: An International Review.

Corporate Ownership and Control.

Entrepreneurship Theory and Practice.

Family Business Review.

International Entrepreneurship and Management Journal.

Journal of Business Research.

Journal of Business Venturing.

Journal of Family Business Strategy.

Journal of Financial Economics.

Journal of Management.

Journal of Management and Governance.

Journal of Small Business Management.

Service Industries Journal.

Small Business Economics.

Strategic Management Journal.

Venture Capital.

Using the same search terms from Method 1 yielded a list of 237 articles extracted from the journals in the final list of 20 journals in the study [ 4 ]. A careful examination yielded a subset of 32 articles with interest for our detailed study into alternative governance. These articles were loaded into an Endnote directory and then transferred to NVivo.

Figure 1 shows that interest in alternative forms of SME governance is spread across the whole period of interest. Also shown here is the historical development of SME governance research from Method 1. This is represented in two ways – both the total study (112 articles) and the SME only subset (83 articles).

2.4 Define an analytical framework and measure reliability and validity of coding

A subset of the articles was coded independently by both authors and the results discussed and amended. There were no changes required to the nodes at this stage. The remainder of the coding was completed by one of the authors.

2.5 Code all the journal articles

The articles were manually coded in NVivo for both methods. Bibliometric analysis on the output from Method 1 was performed using VOSviewer. Issues in the coding were checked with the other author. The results of this analysis are presented in Sections 3 and 4 and can be used to answer RQ1 and RQ2. RQ3 is discussed in Section 5.

3. Small and medium-sized entities governance

Here, in addition to the historical development displayed in Figure 1 , we provide an analysis of the research identified using Method 1, relating to SME governance broadly. We analyse 112 articles. This assists to answer the first research question and contributes by describing this scattered literature graphically and by researcher. In this discussion, we focus on the topics covered in this research, the clusters and networks of keywords using bibliometric tools ( Figure 2 ) and extract the findings specific to alternative CG.

3.1 Small and medium-sized entities governance in the broader literature

Of the 112 studies analysed, 83 studies are focused specifically on SMEs or smaller entities. The remaining studies are focused on larger entities and the subset of smaller entities is used to provide further insight. The most common area of study is the impact of CG on performance or growth (37 articles). Some other areas of study were related to board composition and characteristics (19), capital structure (10), export behaviour and internationalisation (6), entrepreneurial orientation and value creation (5), conceptual/theory development/literature review (4), auditors (4), CSR (4), disclosure (4), earnings management, predictability and quality (4) and strategy development (2). Future research could synthesise the findings in each of these categories. We incorporate some of the findings in Section 5.

3.2 Keyword analysis

Analysis of the keywords in the 112 articles using VOSviewer is depicted in Figure 2 . The analysis identifies 9 clusters of keywords that appear at least four times in the keyword lists of the 112 articles. The largest of these (red) identifies that the studies relate to governance in SMEs, particularly focused on performance (board of directors, financial performance, boards, CG, family firms, ownership, small and medium-sized entities). Next there are two significant clusters. The first of these (green) indicates keywords relating to the stakeholders and functions of boards (business and economics; decision-making, strategic management, stockholders); the second (blue) indicates a cluster of studies relating to the structure, characteristics and composition of boards (board composition, size, structure). In yellow, there is a cluster relating to specific topics of interest in CG studies such as CSR, ethics, sustainability, gender and leadership.

3.3 Evidence of alternative governance in the broader literature

Far from being a legal requirement, in this body of research, we find hints at the use of, and need for, alternate CG in SMEs. Shortage of skills in SMEs is informed by Lekhanya (2015) who asserts that “average” entrepreneurs do not have the required skills for CG. Barroso-Castro et al. (2020) underline the importance of knowledge and specialisation for dynamic decision-making. Further, Minichilli and Hansen (2007) highlight the importance of diversity of advice and knowledge in times of crisis and growth ( Barroso-Castro et al. , 2020 ); Alzubaidi (2021) find support from outside counsel and consultants; Chiu et al. (2020) mention the importance of external CG provided by Certified Practicing Accountants and Big 4 firms; Kussudyarsana et al. (2020) discuss relational governance arising from informal and network-based sources; and Audretsch et al. (2013) posit that firms employ professional outside teams to provide monitoring in family firms.

The potential for employees to provide the missing strategic skills has been raised but is not clear. Wells and Mueller (2014) find that employees are not seen as a source of missing and needed skills and characteristics for governance, but that independence is essential for directors to provide sufficient monitoring and assist with changing and volatile responsibilities and environments. Durst and Henschel (2014) , however, find that some SMEs rely heavily on their employees for strategic opinions.

4. Alternative governance findings, insights and critique

RQ1 . How is the corporate governance literature developing with respect to alternative governance in SMEs?

RQ2 . What is the focus of the corporate governance literature particularly relating to alternate governance in the SME sector?

4.1 Author demographics

The 32 articles included in the study were written by 71 distinct authors from 48 different affiliations and there is no concentration of specialisation in any one institution. Seven of the authors contributed to two articles each; Nordqvist, co-authored three articles ( Brunninge et al. , 2007 ; De Massis et al. , 2016 ; Machold et al. , 2011 ) and Huse contributed to four ( Gabrielsson and Huse, 2002 ; Gnan et al. , 2015 ; Huse, 2000 ; Machold et al. , 2011 ). Huse, the most prolific author in our set, has an established interest in CG and Minichilli and Gnan have an interest in both governance and family firms. For these collaborators, then, there appears to be a genuine interest in this area of research.

Regarding the widely dispersed affiliations of the authors, Massaro et al. (2016b ) find similar dispersion in their SME study. This highlights the need to differentiate CG studies specifically within the CG area. Massaro et al. (2016b ) concur, attributing this dispersion to a lack of focus of authors on SMEs. It could also be attributable to the emerging nature of this topic and difficulty of access to data.

4.2 Regions of research

The regions under study are of interest given the lack of available data on SMEs. Europe is best represented with 20 studies; Asia (specifically Korea, Taiwan and Thailand) has four studies; the USA and Africa have two studies each; only one originates in Canada. This spread indicates some opportunity for further research, particularly in emerging economies, where there are often more SMEs than larger entities. We found no studies in Australasia, South America, India, China and other parts of Asia.

None of the studies appears to be international in nature. However, Massaro et al. (2016b ) caution that SMEs are not consistently defined across nations, which must be considered when undertaking cross-country comparison. For example, van den Heuvel et al. (2006) specify a minimum criterion of “employed at least five people”; Abor and Biekpe (2007) discuss firms with “less than a hundred employees”; and Gubitta and Gianecchini (2002) include companies smaller than €15m.

4.3 Research methods

We coded the articles with respect to research methods used, finding an emphasis on quantitative methods. These articles use regression and empirical models to study both cross-sectionally and longitudinally. For example, Hung and Chen (2009) perform a longitudinal analysis of 62 Taiwanese SMEs to examine minimum shareholder requirements. The remaining articles use case studies ( De Massis et al. , 2016 ), interviews ( Gubitta and Gianecchini, 2002 ), perform literature reviews ( Gabrielsson and Huse, 2005 ; Hung, 1998 ) or use mixed methods.

4.4 Theoretical foundations

Not surprisingly, given the topic of CG, agency theory, resource-based/dependency theory and stewardship theory feature frequently. Each of these perspectives generates valuable insight for CG, but the relevance of these lenses in the SME setting remains unclear and requires further exploration. There is a missing cohesive theoretical framework for SME CG studies. Further, some authors have no clear application of theory. This is true particularly for quantitative studies; for example, Black and Kim (2012) and Joh (2003) .

van den Heuvel et al. (2006) examine approximately 30 articles to ascertain the role of board members in small and medium-sized family businesses. The dominant theory they identify is agency theory, used to describe a control or monitoring role performed by the board members, including succession planning and “parental altruism” ( van den Heuvel et al. , 2006 , p. 480). Brunninge et al. (2007) examine a sample of over 800 SMEs, concluding that for closely held SMEs struggling with strategic change, an option is to use outside directors on the board. Their article investigates the interaction of different governance mechanisms, identifying that in SMEs, separation of management and ownership is sometimes unclear. This commonly stated lack of separation in SMEs causes dissonance when we note that the most frequently used theory is agency theory that relies on that separation. Many find that the size of a typical SME and owner-manager status of the CEO means there is no agency conflict ( Abor and Adjasi, 2007 ; Calabrò and Mussolino, 2013 ; Gnan et al. , 2015 ). This is explored further in Section 5, in response to RQ3.

“Control” is fairly evident in the boards studied, but authors also identify a “service role” ( van den Heuvel et al. , 2006 , p. 478) with multiple characteristics, including resourcing, strategic planning and service. The service role is perceived as more important in family businesses ( van den Heuvel et al. , 2006 ). van den Heuvel et al. (2006) call for more clarity in defining and ranking the tasks boards undertake, particularly in SMEs.

Application of stewardship theory by Arosa et al. (2010) leads them to conclude that the focus of SME CG should be service and advice. These are both roles easily outsourced. According to Gnan et al. (2015 , p. 358), this theoretical perspective is particularly apt when studying SME CG because it “represents agents with cooperative and pro-organizational attitudes and with a natural propensity to align their goals with those of the principal, because of a number of conditions like intrinsic personal features, needs and motivations; identification with the company and commitment to company values; power intended as a service; a collectivistic company culture; and a participative and trust-oriented management philosophy”. Succession planning within families also aligns the family-led SMEs to a stewardship perspective ( Hung and Chen, 2009 ).

Another prominent theory is resource dependency. From a resource-based or resource-led theory perspective, studies emphasise the scarcity of skilled resources available to SMEs for CG. Gabrielsson and Huse (2002) highlight that SMEs can co-opt these resources from outside their organisations [for example, from venture capitalist (VC) firms]. “Familiness” is considered a resource by Matser and Gerritsen (2010) , who also use social and human capital to guide their discussion. They highlight the possible use of resources from outside the formal board structure such as “business contacts, networks and tacit knowledge” (p. 473).

Examples of alternative theoretical perspectives include Birnbaum (1984) (alternatives for uncertainty); De Massis et al. (2016) (an extension to new product development (NPD) design principles); and Dunn (1996) (systems theory). This use of alternative theoretical frameworks provides richness of understanding and may be more applicable to SMEs than more traditional theoretical approaches.

4.5 Focus of the articles

Two prominent topics discussed are impact on performance (15 of 32 articles) and governance structures (7 of 32 articles). The impact of CG on firm or company performance extends from the CG literature of large firms into the SME sector ( Abor and Biekpe, 2007 ). Authors note a gap in understanding the functioning of boards of directors in SMEs ( Arzubiaga et al. , 2018 ; Machold et al. , 2011 ), particularly where there is less regulation and different control structures ( Bennedsen et al. , 2008 ). Consulting advisers providing expertise unavailable within an SME are found to be useful for maximisation of profits and increased returns by Soriano (2004) .

The relationship between CG, family ownership and performance is also explored. Merino et al. (2015) find that too much involvement from family members can be detrimental ( Bennedsen et al. , 2008 ). Arzubiaga et al. (2018) examine the link between entrepreneurial orientation and innovation, finding that external family members may suppress innovation. Calabrò and Mussolino (2013) highlight that informal and formal governance mechanisms co-exist and create relationships and trust needed for increasing export intensity in family SMEs. The same, “participative governance” between boards and family members is documented by Zaefarian et al. (2020) in the context of positive development of international market information acquisition capability. A stream of research examines the roles played by families and VCs within and outside board structures, and some articles hint at alternative CG. For example, the authority of founding members and concentration of family ownership ( Miller et al. , 2012 ; Randøy and Goel, 2003 ) and the impact of insider/outsider directors on performance ( Arosa et al. , 2010 ; Black and Kim, 2012 ; Hung and Chen, 2009 ; Miller et al. , 2012 ).

Hung (1998) provides a foundational typology of six major governance roles: “linking, coordinating, control, strategic, maintenance and support”. These are expanded by van den Heuvel et al. (2006) , who add definitions for the board’s role focus and theoretical perspective nodes. Using Hung’s (1998) typologies to code the articles in the study, we find that the most common focus is the control role (11 articles). Of particular interest were costs and benefits and the type of monitoring ( Ho et al. , 2010 ; Linck et al. , 2008 ; Mande et al. , 2011 ; Randøy and Goel, 2003 ), accountability norms ( De Massis et al. , 2016 ), expropriation of resources ( Joh, 2003 ) and leadership ( Machold et al. , 2011 ; Miller et al. , 2012 ).

Eight articles study the strategic role of boards, with Matser and Gerritsen (2010) demonstrating improved strategy and better performance where a governance board operates. Strategic studies focus on advice provision, the impact of a good network ( Bennedsen et al. , 2008 ) and the determination of corporate direction ( Ebrahim et al. , 2014 ). We see evidence of the key role of external independent directors in the CG literature ( Abor and Adjasi, 2007 ; Songini and Gnan, 2015 ), including interest in independent directors in SMEs and their influence on strategic change ( Brunninge et al. , 2007 ); advising, monitoring ( Ho et al. , 2010 ; Randøy and Goel, 2003 ); and control ( Joh, 2003 ). Linking performance and structure, Abor and Biekpe (2007 , p. 29) conclude that “board size, board composition, management skill, CEO duality, inside ownership, family ownership, and foreign ownership” impact firm profitability, particularly the ability to access financing. Hung and Chen’s (2009) SME study concludes that insider shareholding acts as a threshold or tipping factor for performance.

4.6 Understanding optimal small and medium-sized entity board structures

In spite of an emphasis on the relationship between governance structure and performance, a clear understanding of efficient board characteristics, composition and behaviours remains elusive, particularly in the SME context ( Barroso-Castro, 2020 ). Related to governance structure, Brunninge et al. (2007) suggest that a focus in the literature arises from the interaction of management and boards that impacts their ability to adopt strategic change. The importance of getting this structure right is highlighted in several studies ( Gabrielsson and Winlund, 2000 ). For example, the structure of the SME board is identified as a key element in infrastructure and innovation, facilitating access to equity financing ( Mande et al. , 2011 ) and providing resource monitoring ( Randøy and Goel, 2003 ). Other topics include innovation and new product development ( Arzubiaga et al. , 2018 ; Bennedsen et al. , 2008 ; De Massis et al. , 2016 ; Dunn, 1996 ) and investment in infrastructure such as information technology. Machold et al. (2011 , p. 371) highlight that informality in processes, lack of structure and “role integration” should motivate study of SME boards.

Evidence of the importance of alternative governance structures is provided by Abor and Adjasi (2007) who advocate incorporating the views of employees, unions, communities and other stakeholders. Calabrò and Mussolino (2013) further suggest that formal and informal systems can co-exist in complementary and supplementary ways. For example, family councils may act as substitutes for CG control mechanisms ( Gnan et al. , 2015 ), suggesting that SMEs rely on these outside groupings for ownership and monitoring. Gubitta and Gianecchini (2002) examine reliance on non-family members in growing family firms. Moss et al. (2021) argue that characteristic responses to resource scarcity in entrepreneurs, such as bootstrapping, bricolage and creative resourcing, may create unexpected synergies in partnerships and external governance. Studies find that SMEs backed by VCs have differently structured and more active boards ( Gabrielsson and Huse, 2002 ). Madill et al. (2005) add that VCs provide networking, advice, assistance and business intelligence to the firms in which they invest, with Scheela and Jittrapanun (2012) finding they provide non-financial advice, allowing them to overcome risks such as political uncertainty and weak legal systems.

From a board composition perspective, Machold et al. (2011) focus on team performance and role of the CEO, highlighting the importance of the chairperson’s leadership, board development and the knowledge of board members. This could be extended to outsourced or advisory boards, which are likely to perform well on these criteria. Méndez and García (2007) also suggest that owners’ personal networks are important in SME strategy development, raising the question of the influence of outsourced board members’ networks.

5. Discussion and future research

In this study, we have stood on the “shoulders of giants” to undertake a SLR ( Massaro, et al. , 2016a ) and bibliometric analysis of CG in SMEs. This approach afforded a detailed overview of existing literature, including the properties of CG in SMEs and importantly uncovered evidence suggesting the existence of alternative forms of CG. Like Mattei et al. (2021) , the following discussion draws upon the above analysis to present critical areas of future research that can build a better understanding of the nature of current CG in SMEs, and, perhaps more importantly, to develop innovative approaches to CG in SMEs to better meet the needs of these organisations. In particular, we emphasise the need to take a broader approach to understand CG in SMEs. In doing so, we address RQ3 of this study.

5.1 A broader understanding of small and medium-sized entity corporate governance

In spite of criticism that boards in SMEs may exist simply to satisfy ceremonial or regulatory requirements ( Arzubiaga et al. , 2018 ), there is evidence that well-structured boards can play a far broader and more relevant role for SMEs ( Cumming et al. , 2021 ; Gnan et al. , 2015 ). The nature of CG in SMEs and how SMEs access the services and resources afforded by formal CG structures may be more diverse than in their larger counterparts. We find that SMEs are indeed accessing the skills and resources typically provided through CG, but via various mechanisms such as VCs, employees and their business ecosystem.

A significant proportion of literature focused on “control” as a critical function of boards ( van den Heuvel et al. , 2006 ). This makes sense in the context of larger organisations, where agency and monitoring have an important function, but arguably less so in SMEs. For example, Bennedsen et al. (2008 , p. 1099) highlight that the influence of a CEO as owner as well as manager leads to reduced emphasis by the board on “hiring, monitoring and providing the right incentives for […] daily management”. In smaller firms, the need for control and for a board to act as agents of external stakeholders may be less important than the provision of extra-organisational resources, including networks, knowledge and strategic capability, to augment the generally resource constrained nature of SMEs ( Calabrò and Mussolino, 2013 ; Faizabad et al. , 2021 ; Li et al. , 2020 ). Our analysis found that these resources are being fulfilled in a variety of ways in practice.

Gordon et al. (2012) suggests resource and cost-driven shortages could be resolved by having SMEs focus on parts of CG such as board composition, valued by investors, rather than trying to achieve all roles found in large firms. Madill et al. (2005) find that half of the angels in their study were represented on the board, and that SMEs rely on angel investors for non-financial functions. The literature posits that an important monitoring role is currently played by institutional investors ( Chen et al. , 2014 ; Cho and Lee, 2017 ; D'Angelo et al. , 2016 ). These insights suggest that a broader perspective on what constitutes board structure is warranted and requires future research which delves more deeply into the ways in which SMEs are augmenting their organisational resources.

Furthermore, the influence of board structure on innovation is a worthy focus of future research ( Arzubiaga et al. , 2018 ; Sierra-Morán et al. , 2021 ). Randøy and Goel (2003) find that founder-led firms benefit from strategic agility because of lower agency monitoring that is advantageous for innovation. Linck et al. (2008) suggest a positive relationship between smaller, more independent boards and high-growth and high R&D firms. For family SMEs, the literature particularly emphasises innovation ( De Massis et al. , 2016 ), the challenges of finding the required skills within the family unit ( Arzubiaga et al. , 2018 ) and balancing the need for appropriate skills sets and power sharing ( De Massis et al. , 2016 ). These findings suggest the need for research which unpacks the nature of influence that CG has on innovation within SMEs and for research that takes a nuanced approach which encompasses the variation that might exist within different SME forms, such as high-growth, family-owned or industry diversification.

The optimal size of boards in SMEs is also contentious. This is particularly evident in the literature examining board-size impact on performance ( Afrifa and Tauringana, 2015 ; Arosa et al. , 2013 ; Okofo-Darteh and Asamoah, 2020 ). The direction of impact of board size on performance is particularly unresolved for SMEs. Bennedsen et al. (2008) suggest that board size for SMEs should be determined by trading off skills needed and the costs of free-riding members.

Relatedly, understanding what CG roles are performed within and outside of the formal board structure will be valuable, as this may help to resolve conflicting findings like those for board size and performance in SMEs and identify how SMEs are dealing with the skills gap in CG. The literature on the alliances formed between SMEs and entities from other sectors, largely motivated by the need of resources ( Alvarez et al. , 2006 ; Ariño et al. , 2008 ; Dickson et al. , 2006 ; Marino et al. , 2008 ), also offers some options for structuring alternative boards. Ladegard and Rasmussen (2015) pose some useful questions about the roles of independent directors in SMEs: do they act individually or in a group? Do they have specific roles to play? We add: Can these roles be outsourced so that expertise is shared across multiple SMEs, similar to the way in which independent directors may provide directorships to multiple larger entities? This may go some way to relieving the barriers arising from lack of time non-executive directors have to spend on SMEs ( Annuar, 2012 ).

5.2 Many theoretical insights into how small and medium-sized entities corporate governance functions, none definitive

There are many opportunities to further explore theoretical frameworks and develop new theories specifically for SME CG. Also, smaller firms, because of their “relatively simple network arrangements”, might be a good starting point for developing new theory for larger firms, and this could be relevant to their adaptability to new alternative forms of CG.

Collective rather than independent application of theory is suggested by several authors ( Miller et al. , 2012 ) as a means to overcome the conflicts arising from common theoretical approaches (particularly agency, stewardship and resource dependency theory) ( Gubitta and Gianecchini, 2002 ). Relatedly, Chen et al. (2014) and Cho and Lee (2017) propose integrating agency theory and a resource-based theoretical perspective to understand the nexus between governance and internationalisation in family firms. Di Vito and Trottier (2021 , p.17) suggest advancement in the CG space will occur through the employment of a greater diversity of theory from the areas of management and psychology, such as sensemaking, institutional theory and strategic renewal. Jain and Jamali (2016 , p. 267) urge researchers to explore theories from “sociology and socio-psychology” when exploring expanding board roles and the influence of stakeholder groups other than shareholders on CG. We also suggest further research using a paradigm identified by Saxena and Jagota (2015 , 2016 ). Using the theories of articulation of decision-making, institutional theory and organisational contingency theory, these authors introduce a sociological framework for understanding SME CG that takes into consideration the environment and ecosystem of SMEs. This framework should open additional research that incorporates alternative governance.

Access to CG resources has an impact on small firms’ ability to innovate and grow ( de Cleyn and Braet, 2012 ). However, there is evidence that high-growth firms do not need the monitoring functions of the board ( Ladegard and Rasmussen, 2015 ). This is presumably because many high-growth SMEs are owner-managed. What resources and skills are therefore necessary? Barroso-Castro et al. (2020) suggest that research using a contingency view of CG could help to explore different organisational settings and, we suggest, could include examining where and how these resources are currently sourced that would assist with developing an SME-specific understanding of resource-dependence theory ( Ladegard and Rasmussen, 2015 ).

Agency theory should not logically apply to owner-manager firms ( Randøy and Goel, 2003 ), but it is the most common theory we found in the SLR set of articles. To address this dissonance, we conducted a closer examination of these articles. The small size of SMEs and lack of resources mean that delegation and separation of board roles is sometimes difficult ( Gnan et al. , 2015 ) and some suggest there is no need for monitoring in SMEs ( Abor and Adjasi, 2007 ). Others rely on large firm studies using the theory and then conclude that it is not relevant for SMEs ( Ebrahim et al. , 2014 ). Where the theory appears relevant, authors contend that agency–type conflict lies in the relationship between dominant (family or affiliated) owners and minority shareholders ( Arosa et al. , 2010 ; Gnan et al. , 2015 ).

The closeness of relational ties could cause conflict of interest and diminished objectivity. Other similar monitoring conflicts may arise when governance is under the control of inept or too many related members ( Bennedsen et al. , 2008 ). This is likely to be most evident in times of crisis or risk, as these relational ties promote more conservative strategy (Brunninge et al. , 2007; Merino et al. , 2015 ). Agency conflict also arises in SMEs because of control crises arising from the lack of differentiation between ownership and management and scarce human resources that reduce the CG structures to fora for airing grievances ( Gabrielsson and Winlund, 2000 ; van den Heuvel et al. , 2006 ). Like Oehmichen (2018) , we propose that CG SME research should not take these conflicting perspectives as an indication of irrelevance, but instead should seek to further explore agency theory to better understand, and potentially make contributions to, agency theory in the SME context.

5.3 Methods used – more diversity and closer relationship between academe and practice

We found that most studies used quantitative methodology, which is not surprising given the emphasis on performance, while a portion of studies used qualitative methodologies. Given the relatively underexplored and nascent nature of research exploring CG in SMEs and particularly alternative forms of CG in this context, there is a need to ensure that research does not prematurely narrow its focus ( Bracci et al. , 2021 ). We therefore support calls for greater emphasis on exploratory research, which will likely use a diversity of qualitative and mixed method approaches ( de Villiers et al. , 2019 ; Dwekat et al. , 2022 ). Authors have been using creative combinations to extract insights in other related research areas. For example, Dwekat et al. (2020a ) combine bibliometric and social network analysis to examine the effect of boards on CSR. Following calls from Jain and Jamali (2016) , and relying on complexity theory, Dwekat et al. (2020b ) use fuzzy set qualitative comparative analysis to overcome the shortcomings of symmetric quantitative approaches by supplementing their analysis with qualitative data.

There is a clear need for research which facilitates the development of new theory specifically relevant for the SME context. In the SME space, it is particularly important that research and findings have clear and direct practical applications, and this will be facilitated by collaboration between researchers and practitioners ( Massaro et al. , 2016a ; Rosli et al. , 2018 ). We suggest researchers explore the opportunities and benefits afforded by engaged scholarship which is “a participative form of research for obtaining the different perspectives of key stakeholders in studying complex problems” ( Van de Ven, 2007 , p. 9). Engaged scholarship is acknowledged for its capacity to strengthen the quality and impact of academic research, which is important given the identified disparity between what appears to be occurring in practice within the SME community and the extant academic understanding ( Simba and Ojong, 2017 ).

5.4 Contextualised research

SMEs are widely variable across, for example, national, regional and sectoral contexts and internally regarding growth intentions and outcomes. With Di Vito and Trottier (2021) , we caution against a “one-size-fits-all” approach to understanding CG. Research must be conducted in a way that captures and enables knowledge generation from this heterogeneity. Our findings reinforce the need for contextualised research which will facilitate insight that might otherwise “remain invisible to us” through uncovering “difference where we might otherwise expect sameness” ( Welter et al. , 2019 , p. 321). For example, valuable insights are generated through the exploration of country-specific governance laws which provide valuable insights into how CG impacts performance. In the Netherlands, for example, firms are permitted an advisory and/or supervisory board, and this structure is voluntary for many SMEs ( Matser and Gerritsen, 2010 ). These authors exploit this unique setting to isolate a relationship between governance boards and the existence of written strategic plans and expected marketability of the firm. Relatedly, we note a lack of research in emerging economies. SMEs are responsible for most of the job creation in developing countries, yet we know little about how the likely variation in CG in this context influences SME outcomes ( Ararat et al. , 2021 ). Finally, size is a critical component in CG SME research that has not been sufficiently addressed. That is, a contextualised approach to studying CG in SMEs requires moving beyond considering scale as the only difference between SMEs and larger firms ( Nolan and Garavan, 2016 ). This will require a deeper approach to understanding how variation in size might shape CG within the SME context and acknowledging the widely varying national definitions of SMEs ( Massaro et al. , 2016b ).

5.5 Practical implications

Several practical and policy implications can be drawn from our study. Our findings uncover a variety of mechanisms used that afford SME access to skills and resources traditionally generated by CG, such as networks, capital providers and professionals such as accountants and solicitors ( Baker and Nelson, 2005 ; Dwyer and Kotey, 2016 ). Because SMEs may lack the requisite skills and resources to develop their own alternative CG structures, policymakers could look to create regionally located “pools” of resources that might be accessed by SMEs. Additionally, this study builds a better understanding of the role that CG can play for SMEs. SME owners and managers can benefit from this study by exploring the various avenues for incorporating the benefits of CG in their enterprises. Policy could support such incorporation of CG in SMEs through the provision of training designed specifically to target SME owners and managers to better equip them to leverage CG opportunities, including how they might develop and manage alternative forms of CG for their enterprises. Local regulations may need to be amended to allow for SMEs to use alternative CG rather than the formal board of directors.

Limitations to this study relate to our reliance on citation frequency to narrow our initial list of articles, meaning that we have missed an emerging conversation. However, our broad bibliometric study did not reveal any other obvious sources and in total we reviewed 455 articles in Method 1 and 237 in Method 2.

thesis paper on corporate governance

Frequency of publication of articles

thesis paper on corporate governance

Keyword map for Method 1: SME governance

All journals with “board” or “governance” in the title from the ABDC list

Selected coding for nodes

Top 20 journals where the articles in Table 4 are cited/referenced by number of citations/references

See, for example, “What is a virtual CFO?” at https://vcfoassociation.com.au ; “Rise of the Virtual CFO” at www.acuitymag.com/technology/rise-of-the-virtual-cfo

In the Netherlands, for example, a two-tier system allows for the creation of supervisory boards almost solely of independent outside members. In some SMEs, this structure is voluntary.

“Company Secretarial Services & Corporate Governance: Outsourcing is increasingly the answer for smaller firms”. Sunday Business Post , Cork, June 15, 2014.

This list is available on request from the corresponding author.

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Home » Blog » Dissertation » Topics » Corporate Governance » Corporate Governance Dissertation Topics (28 Examples) For Research

thesis paper on corporate governance

Corporate Governance Dissertation Topics (28 Examples) For Research

Mark Aug 21, 2021 Aug 12, 2021 Corporate Governance No Comments

Corporate governance refers to the code of conduct for global business corporations. It is important for businesses to act responsibly and contribute to the betterment of society and people. As the concept of corporate governance has emerged, the scope and area for research have increased. We provide you with a list of corporate governance dissertation […]

corporate-governance-dissertation-topics

Corporate governance refers to the code of conduct for global business corporations. It is important for businesses to act responsibly and contribute to the betterment of society and people. As the concept of corporate governance has emerged, the scope and area for research have increased. We provide you with a list of corporate governance dissertation topics.

The research topics on corporate governance and project topic on corporate governance are listed to help students in selecting a topic for their research and thesis. We have sorted down some of the most interesting corporate governance dissertation topics and can provide you with a brief on the selected topic.

A list Of Corporate Governance Dissertation Topics

A comparison of corporate governance policies and practices in the years 2010 to 2020.

Studying the impact of corporate governance practices on the management and leadership styles.

Identifying the most effective corporate governance strategies and its impact on organizational reputation.

An integrated analysis of the corporate governance practices in developing countries.

To investigate the impact of corporate governance policies and their implementation on the monetary success of large businesses.

Analysing the competence of corporate governance in a state-owned enterprise in the UK.

Comparing the policies of corporate social responsibility and its causes and effects.

Can effective corporate governance contribute to dealing with the global recession?

Studying the role of audit practices in corporate governance.

Evaluation of corporate governance regulations in the US and the UK.

Studying the importance of ethics in corporate governance taking a real-life case example.

A literature review on the corporate governance in a family-based business.

To study the impact of corporate governance on earning management in SMEs.

How does corporate governance affect the financial performance and financial stability of a business?

Studying the board attributes and corporate social responsibility disclosure.

Investigating the relationship between corporate governance and operating cash flow.

How does effective corporate governance help in building and maintaining relationships with the strategic partners?

To study the impact of ownership structure and corporate governance on the success of a business.

Does effective internal audit help in developing corporate governance policies and regulations?

To investigate the effect of accounting conservatism and corporate governance on tax avoidance.

Studying the impact of corporate governance on voluntary risk disclosure in large businesses in the UK.

The relationship between corporate governance and enterprise risks in the banking industry.

The contribution of innovation in enhancing corporate governance in organisations.

The importance of developing a code of conduct to manage organisational behaviour.

A literature review on corporate governance and its growing importance.

Studying and comparing the laws and policies related to corporate governance in the UK and the United States.

What is the role of corporate governance in the case of blockchain technology?

The role of corporate governance in long-term competitiveness based on value-added measures.

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A thesis paper on corporate governance compliance in Bangladesh

Profile image of Belal Hossain

• To be familiar with the rights of the shareholders in the banking sector to assess the status of monitoring bank's client on their CG practices • To go through Code of governance by Bangladesh Bank and Bangladesh Securities & exchange Commission with a view to getting sufficient knowledge on that.

Related Papers

Bhuiyan, M.H.U., Hossain, D.M. and Biswas, P.K. (2007), Audit Committee in Banks: Current Regulatory Framework and Disclosure Practices in Bangladesh, The Cost and Management, Vol. 35, No. 2, pp. 5-18. (Bangladesh).

DEWAN MAHBOOB HOSSAIN

thesis paper on corporate governance

Bhimappa Navi

The corporate governance practices are generally helps in improving the quality of life of the cooperative banks. The governing practices are used to refer changes and movements of the banking system and its activities. The need for corporate governance in developing, emerging and transitional economies not only arises from resolving problems of ownership and control, but also from ensuring transparency in achieving the desired goal of corporate governance in perspective of cooperative banks. In the co-operative banking sector the corporate governance is not practiced perfectly because of lack of management, poor board governance, fraudulent activities, lack of disclosure and transparency. The distinct nature of co-operatives, relevant trends and issues within corporate governance are explored within the framework of the co-operative sector. And this implies that three groups require clearly defined rights and responsibilities; members, directors and managers. The present study has encompasses both primary and secondary data. The sample size includes 20 Co-operative banks which are situated in Vijayapur city. The simple statistical measurements have used to analyse the data. In this paper an attempt has been made to understand the problems and prospects of governance practices in cooperative banking sector. The paper traces out the possible benefits and adverse effect of negligence in governance practice and try to suggest some measures to overcome from possible adverse impacts of the same.

Dr. Mallikarjun M . Maradi

Abstract: The corporate governance practices are generally helps in improving the quality of life of the co-operative banks. The governing practices are used to refer changes and movements of the banking system and its activities. The need for corporate governance in developing, emerging and transitional economies not only arises from resolving problems of ownership and control, but also from ensuring transparency in achieving the desired goal of corporate governance in perspective of cooperative banks. In the co-operative banking sector the corporate governance is not practiced perfectly because of lack of management, poor board governance, fraudulent activities, lack of disclosure and transparency. The distinct nature of co-operatives, relevant trends and issues within corporate governance are explored within the framework of the co-operative sector. And this implies that three groups require clearly defined rights and responsibilities; members, directors and managers. The present study has encompasses both primary and secondary data. The sample size includes 20 Co-operative banks which are situated in Vijayapur city. The simple statistical measurements have used to analyse the data. In this paper an attempt has been made to understand the problems and prospects of governance practices in cooperative banking sector. The paper traces out the possible benefits and adverse effect of negligence in governance practice and try to suggest some measures to overcome from possible adverse impacts of the same. Keywords: CG, Cooperative banks, Governance principles and dynamics of CG.

IAEME Publication

This study aims to investigate the relationship between four corporate governance mechanisms (board size, board independent director, chief executive officer duality and board audit committee) and financial performance of banking industry in order to identify whether or not bank’s profitability is positively associated with its corporate governance disclosure level. The two financial ratios i.e., return on asset (ROA) and return on equity (ROE) are used to measure the financial performance. The study is based on the sample of listed conventional private commercial banks in Bangladesh selecting on the basis of a number of criterion. A linear regression analysis is used to analyze data and to test the hypotheses. Empirical results indicate that Board Independent Director has a positive relationship with ROA but positive significant relationship with ROE. Board Size has a positive relationship with ROA but negatively correlated with ROE. On the contrary, Board Audit Committee has negative relationship with both ROA and ROE. All the banks properly maintain the rules of BSEC regarding CEO duality.

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  22. Corporate Governance Dissertation Topics (28 Examples) For Research

    A list Of Corporate Governance Dissertation Topics. A comparison of corporate governance policies and practices in the years 2010 to 2020. Studying the impact of corporate governance practices on the management and leadership styles. Identifying the most effective corporate governance strategies and its impact on organizational reputation.

  23. A thesis paper on corporate governance compliance in Bangladesh

    Abstract: The corporate governance practices are generally helps in improving the quality of life of the co-operative banks. The governing practices are used to refer changes and movements of the banking system and its activities.