Does Corporate Governance Matter? New Evidence from the United Kingdom

Abstract

Using a governance index derived explicitly from the main recommendations of the London Stock Exchange Combined Code, we find that stronger and more explicit corporate governance systems are associated with increased firm value and performance, as well as lower levels of capital expenditure and institutional shareholdings. While overall corporate governance is important, not all governance characteristics of the firm have the same effect. Whereas ownership and remuneration policies improve corporate performance, the quality of disclosure and audit is a more important driver of corporate value and capital expenditure. Board structure, which is the most frequent topic of research in corporate governance, is shown to have no impact on performance, value, investment or institutional ownership.

Keywords: Corporate Governance, Firm Performance, Corporate Governance Index, Investment, Institutional Shareholdings, Comply or Explain

JEL Classification: G34