An Empirical Analysis of the Impact of Corporate Governance Mechanisms on the Performance of UK Firms

38 Pages Posted: 10 Oct 2001

See all articles by Charlie Weir

Charlie Weir

Robert Gordon University - Aberdeen Business School

David Laing

Robert Gordon University - Centre for the Enhancement of Learning and Teaching (CELT)

Phillip J. McKnight

University of St. Andrews - School of Management

Abstract

The agency model provides a number of ways to address the problems raised by the separation of ownership and control in public limited liability companies. In its Code of Best Practice, the Cadbury Committee proposed a variety of monitoring mechanisms which, if implemented, should improve corporate governance. As part of the Code, it was recommended that firms should have adequate non-executive director representation. They should also appoint an audit committee, the primary purpose of which was to monitor the auditing controls of the company. The extent to which these structures influence performance is analysed. In addition, we analyse the structure and calibre of audit committee membership and its effect on the performance of 312 large UK quoted companies. The effectiveness of the market for corporate control is investigated by means of take-over intensity by sector. We find that neither the independence of the committee membership nor the quality of the committee members has an effect on performance. However, we find that take-over intensity is negatively related to performance. This suggests that external control mechanisms are more effective than internal ones. When performance is split into deciles, there is some evidence that non-executive director independence and the market for corporate control are substitute governance mechanisms.

Keywords: Corporate governance; Firm performance; Audit committee; Cadbury Committee; Entrenchment; Board independence; Duality; Market for corporate control; Takeovers; Governance mechanisms

JEL Classification: G32, G34, L21

Suggested Citation

Weir, Charles and Laing, David and McKnight, Phillip J., An Empirical Analysis of the Impact of Corporate Governance Mechanisms on the Performance of UK Firms. Available at SSRN: https://ssrn.com/abstract=286440 or http://dx.doi.org/10.2139/ssrn.286440

Charles Weir (Contact Author)

Robert Gordon University - Aberdeen Business School ( email )

Garthdee Road
RGU
Aberdeen AB10 7QE
United Kingdom
0044 1224 263800 (Phone)
0044 1224 263838 (Fax)

David Laing

Robert Gordon University - Centre for the Enhancement of Learning and Teaching (CELT) ( email )

Schoolhill
Aberdeen, Scotland AB10 1F
United Kingdom
0044 1224 262246 (Phone)
0044 1224 263344 (Fax)

Phillip J. McKnight

University of St. Andrews - School of Management ( email )

The Gateway
Gateway
St. Andrews, Fife KY16 9SS
United Kingdom

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