The influence of Corporate Governance an Corporate Financial Performance: How the legal Environment Matters

Abstract

This thesis examines how corporate governance performance influences corporate financial performance and how the legal environment acts as moderator and determines the importance of corporate governance for corporate financial performance. A differentiation is made between a civil law and common law environment and evaluated is how companies that are primary listed in one of the two legal environments score on corporate governance pillars and corporate financial performance. Using panel data, including 69,808 firm-year observations for the years 2002-2017, the results show that corporate governance performance has a significant positive effect on the capital market related financial performance indicators Tobin’s Q and market capitalization of a company, while it has a significant negative effect on the operating performance (ROA) of a firm. These results indicate that corporate governance performance in general has a positive effect on corporate financial performance. This positive relationship proves to be significantly stronger for companies a in a country with a civil law system than in a country with a common law system, which indicates that corporate governance performance is more important for corporate financial performance in civil law countries than in common law countries. Additional analysis shows that ensuring an experienced, diverse and independent board is the most important part of corporate governance for corporate financial performance.