Corporate Governance and Firms Financial Performance in the United Kingdom

TL;DR

This study empirically investigates how different corporate governance mechanisms influence the financial performance of UK non-financial firms, revealing mixed effects and emphasizing the importance of selecting appropriate governance practices.

Contribution

It provides empirical evidence on the impact of five corporate governance mechanisms on firm performance in the UK, highlighting the significance of mechanism selection.

Findings

Mixed effects of governance mechanisms on performance

Proper mechanism selection can improve firm finances

Implications for policy and academic research

Abstract

The objective of this study is to examine empirically the impact of good corporate governance on financial performance of United Kingdom non-financial listed firms. Agency theory and stewardship theory serve as the bases of a conceptual model. Five corporate governance mechanisms are examined on two financial performance indicators, return on assets (ROA) and Tobin's Q, employing cross-sectional regression methodology. The conclusion drawn from empirical test so performed on 252 firms listed on London Stock Exchange for the year 2014 indicates a positive or a negative relationship, but also sometimes no effect, of corporate governance mechanisms impact on financial performance. The implications are discussed. Thereby, so distinguishing effects due to causes, we present a proof that, when the right corporate governance mechanisms are chosen, the finances of a firm can be improved. The results of this research should have some implication on academia and policy makers thoughts.