The Corporate Governance and Performance Relation: A Small Firm Perspective

Abstract

Compliance with corporate governance best practice is costly for all firms but can be prohibitively expensive for small firms, squeezing margins and depleting funds for reinvestment (Linck, Netter & Yang, 2008). In addition, small firms are not afforded the external governance mechanism of analyst coverage. Since most of the existing analysis of the relation between governance and performance has been conducted on large-cap firms this additional layer of external monitoring may serve as an omitted variable in the governance-performance relation. We therefore analyse a sample of small firms that are more dependent on their internal corporate governance practices and assess the governance performance relation. We apply dynamic panel generalised method of moments (GMM) models to account for the presence of endogeneity and find no evidence of a relation between a firm’s corporate governance and its performance.

Keywords: Corporate Governance, Performance, Analyst Coverage

JEL Classification: G30