corporate governance mechanisms
The concept of stakeholder primacy (sometimes called stakeholder capitalism) is thought to have evolved from the term shared stakeholder value, coined by Michael Porter and Mark Kramer in 2011[1]. Russias invasion of Ukraine in 2022, coupled with strained relations between two of the worlds economic superpowers (the US and China), are a few of many factors that have converged to create chaos in supply chains, as well as subsequent economic uncertainty on a global scale. Meanwhile, the government as the owner has multiple objectives such as social welfare and some national (political) issues. Susana Sierra is CEO of BH Compliance, which gathers real-time evidence about a corporate compliance program's performance using Blockchain. As Yu and Wen [92] argued, Chinese companies have a concentrated ownership structure, limited disclosure, poor investor protection, and reliance on the banking system. The interaction of managerial overconfidence and CEO duality has a significant negative effect on operational firm performance (0.0202, p>0.05) and a negative insignificant effect on TQ. Econometric analysis of dynamic panel data means that researchers observe many different individuals over time. In other ways, some researchers have indicated, block shareholders harmfully on the value of the firm, especially when majority shareholders can abuse their position of dominant control at the expense of minority shareholders [25]. Filatotchev and Nakajima [26] suggest that an integrated approach bringing external and internal mechanisms jointly enhances to build up a more general view on the effectiveness and efficiency of different corporate governance mechanisms. These studies carefully analyzed and clarified that managerial overconfidence is a major source of corporate distortions and suggested good CG practices can mitigate such problems. According to Baccar et al. Agency theory [81] argued that concentrated ownership can monitor corporate operating management effectively, alleviate information problems and agency costs, consequently, improve firm performance. Literature suggests that when leverage increases, managers may invest in high-risk projects in order to meet interest payments; this action leads lenders to monitor more closely the managers action and decision to reduce the agency cost. %PDF-1.3 % 1 0 obj << /Subtype /Type1 /FontDescriptor 46 0 R /BaseFont /Courier /Widths [ 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 549 600 600 600 576 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 600 ] /Encoding /WinAnsiEncoding /FirstChar 0 /Type /Font /LastChar 255 >> endobj 2 0 obj << /Filter /FlateDecode /Length 2805 >> stream The negative interaction results could be explained by the fact that overconfident leads managers to have lower debt due to overestimate the profitability of investment projects and underestimate the related risks. Jensen [41] suggested in the presence of free cash flow, the manager may overinvest and they can accept a negative net present value project. Generally, the previous findings also support the current study's overall findings: Phua et al. Its primary responsibilities are to hire and replace the CEO as needed, monitor performance, review and approve strategy, and assess financial reporting and risk management. To address these objectives, many hypotheses were developed and explained by a proposing multi-theoretical approach. The so-called Great Resignation has created an environment where the very nature of work (as we once knew it) has changed. Manag Organ Rev 3(2):205225, Phua K, Mandy T, Wei C (2018) Are overconfident CEOs better leaders? The first step is to identify the greatest risks to the business, and then establish action plans to mitigate their effects, such as forming a risk management committee through which policies and procedures (e.g., annual internal audit plans, climate-related mitigation plans and cybersecurity protocols) can be implemented. The Hansen test of over-identification is accepted under the null that all instruments are valid. Hence, overconfident managers have better in accessing debt rather than rational managers in the context of China that leads creditors to allow to follow and influence the firm investments through collecting information about the firm and supervise the firms directly or indirectly. Chou et al. including employees, customers, supply chain partners, and members of the communities in which an organization operates (not just shareholders) should be considered in all strategic and operational decisions. X is the independent variable. All listed companies (Shanghai and Shenzhen stock Exchange) financial statements are included in this database from 1990 and 1991, respectively. Ownership concentration can reduce managerial behaviors such as overconfidence and optimism since it contributes to the installation of a powerful control system [7]. The BOD is also responsible for designing the management teams compensation structure and overseeing their performance. The result indicated in Table 3 PMC and firm performance (ROA) relationship was positive, but statistically insignificant. Abstract. Specifically, TF has written the all parts of the manuscript (introduction, literature), collected, analyzed, and interpreted the patient data regarding the impact of corporate governance on firm performance and as well as the influence of managerial behavior in the relationships corporate governance and firm value in Chinese listed firms. The basic rationale of corporate governance is to increase the performance of firms by structuring and sustaining initiatives that motivate corporate insiders to maximize firms operational and market efficiency, and long-term firm growth through limiting insiders power that can abuse over corporate resources. Corporate governance has got attention and developed as a significant mechanism more than in the last decades. However, concentrated shareholding may create a new set of agency conflicts that may provide a negative impact on firm performance. Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. List of Excel Shortcuts Regarding debt financing, existing empirical evidence shows no specific pattern in the relation of managerial overconfidence and debt finance. The compliance function is the means by which firms adapt behavior to legal, regulatory, and social norms. These reasons translated to combinations or bundles of corporate exchange and governance practices at the firm level and their relation to organisation level and contextual Corporate governance also can separate the number of functions that one division or department completes within an organization. Evidence from Institutional Investors. Cite this article. [18] provided evidence that product market competition has a substantial impact on corporate governance and that it substitutes for corporate governance quality, and they provide evidence that the disciplinary force of competition on the management of the firm is from the fear of insolvency. 2023 BioMed Central Ltd unless otherwise stated. Board of directors and ownership concentration are the main internal corporate governance mechanisms and product market competition and debt finance also the main representative of external corporate governance suggested by many researchers in the literature that were used in this study. School of Business, University of International Business and Economics, Beijing, 100029, China, You can also search for this author in This becomes even more relevant in a context of climate crisis; economic, health and social uncertainty; high levels of corruption; and in a society that demands greater transparency, equity, diversity and accountability. Design/methodology/approach - The paper examines the impacts by estimating the empirical model in which a firms accounting profitability is a Based on literature, we have taken into consideration four broad governance mechanisms: board monitoring, ownership structure, audit quality, and product market competition. Overconfident CEOs tend to think they have more accurate knowledge about future events than they have and that they are more likely to experience favorable future outcomes than they are [35]. Therefore, hypothesis 2a is supported when firm value is measured by TQ. This finding supported by the notion indicates firms with long age have long history accumulate experience, and this may help them to incur better performance (Boone et al. J Financ Econ 100(1):154181. Several studies have investigated in developed economies. The Revies of economic studies 64(2):191213, Shao L (2019) Dynamic study of corporate governance structure and firm performance in China: evidence from 20012015. For instance, Ibrahim [39] reported firms to operate in competitive industries record more returns of share compared with the concentrated industries. The impact of corporate governance measures on firm performance: the influences of managerial overconfidence. Overconfidence is an overestimation of ones own abilities and outcomes related to ones own personal situation [74]. Corporate Soc Responsib Res 18(3):311339, Gillan SL (2006) Recent developments in corporate governance: an overview. These findings have several contributions: first, the study extends the literature on the relationship between CG and a firms performance by using the Chinese CG structure. Among these, the researcher decided to follow a study conducted in emerging markets [55] and used corporate earnings forecasts as a better indicator of managerial overconfidence. Research Methodology. Researchers [34,61] discussed the managerial behavioral bias has a great impact on firm corporate governance practices. To achieve all of this, though, its crucial for companies to promote board leadership through induction, training and evaluation systems that make it possible to detect inefficiencies and encourage continuous improvement. Thus, the current study provides an insight into how a managerial behavioral bias (overconfidence) influences/moderates the relationship between corporate governance mechanisms and firm performance, in an emerging market. WebCorporate governance systems Corporate governance mechanisms vary across institutional environments (Mayer, 1996). [89], which considered previous year performance as one of the significant independent variables in the case of corporate governance mechanisms and firm performance relationships. This includes identifying and mitigating strategic, operational, reputational, and even financial risks within an organization. Structured Query Language (known as SQL) is a programming language used to interact with a database. Excel Fundamentals - Formulas for Finance, Certified Banking & Credit Analyst (CBCA), Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM), Commercial Real Estate Finance Specialization, Environmental, Social & Governance Specialization, Shareholder Primacy vs. Stakeholder Primacy, Current Trends & Corporate Governance Pressures, Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM). It often represents the framework of policies and guidelines for each individual in the business. However, these estimations are better when the explanatory variables are exogenous. Economics of Planning, 34: 5372. The concentration of ownership as a large number of studies grounded in agency theory suggests that it has both the incentive and influence to assure that managers and directors operate in the interests of shareholders [19]. These discussions lead to the conclusion that CEO overconfidence will negatively or positively influence the relationships of CG on firm performance. Thus, the distribution of control power can be measured by calculating the ownership concentration indices, which are used to measure the degree of control or the power of influence in corporations [88]. Several studies are contributed to the effect of CG on firm performance using different market developments. These mechanisms are: board composition (board size, inside directors and outside directors), board committees (audit, remuneration and nomination), The original data are obtained from the CSMAR, and the data are collected manually to supplement the missing value. The study findings showed that ownership concentration and product market competition have a positive significant relationship with firm performance measured by ROA and TQ. The debt financing proxy in this study is measured by the percentage of a total asset over the total debt of the firm following the past studies [69, 95]. WebCorporate governance systems Corporate governance mechanisms vary across institutional environments (Mayer, 1996). Jensen [41] board of directors is described as the peak of the internal control system. Strateg Manag J 16(4):301312, Bozec R (2005) Boards of directors, market discipline and firm performance. There are two competitive views about dual leadership in corporate governance literature. Even with the absence of agency conflicts and asymmetric information problems, there is evidence documented for distortions such as the case of corporate investment. J Bus 59:197216. Thus, the study includes both internal and external CG mechanisms to broadly show the connection of these three components. Internal Mechanism. The CEO reports to the Board of Directors (BOD). Evidence from China. This could be explained by the fact that as debt financing increases in external loans, the size of managerial perks and free cash flows increase and corporate efficiency decrease. Concurrently, external CG mechanisms are mechanisms that are not from the inside of the firm, which is from the outside of the firms and includes: market competition, take over provision, external audit, regulations, and debt finance. All financial data, firm profile data, ownership structure, board structure, composition data of listed companies are included in the CSMAR database. Corp Gov 4:4761, Aggarwal R, Erel I, Ferreira M, Matos P (2011) Does governance travel around the world? Koke and Renneboog [48] have found empirical support that a positive impact of bank debt on productivity growth in German firms. The results indicate board independence has no relation with firm performance measured by ROA and TQ. Regarding control variables, firm age has a positive and significant relationship with both TQ and ROA. Regarding leadership and firm performance relation, there are different arguments; there is not consistent conclusion among different researchers. Tables 3 and 4 indicate the p-value of Hansen test over-identification 0.139 and 0.132 for ROA and TQ measurement of firm performance, respectively, so that these models cannot reject the hypothesis of the validity of instruments. 1). In line with this Khajavi and Dehghani, [44] found that as the number of internal board increases, the managerial overconfidence bias will increase in Tehran Stock Exchange during 20062012. This means the CEO is responsible to execute a companys strategies, monitoring and evaluating the managerial activities of a company. The proportion of the CEO serving as chairperson of the board is 0.292 or 29.23% over the nine years. Google Scholar, Huang W, Jiang F, Liu Z, Zhang M (2011) Agency cost, top executives overconfidence, and investment-cash flow sensitivityEvidence from listed companies in China. In this study, firm size is measured by the logarithm of total assets following a previous study. Table 2 presents the correlation matrix among variables in the regression analysis in the study. I declare that there are no conflicts of interest between authors regarding the publication of this paper. Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. For the success of this relationship, the board of directors and senior management should play an active role, regularly reviewing the stakeholder map, creating action plans with each of them and considering them in all the companys important decisions. To measure firm performance, prior studies have been used different proxies, by classifying them into two groups: accounting-based and market-based performance measures. J Finan Econom 3(4):305360, Keasey K, Wright M (1993) Issues in corporate accountability and governance: an editorial. On behalf of the co-author, I shall bear full responsibility for the submission and I confirm that authors listed on the title page have contributed significantly to the work. Hart [33] stated that competition inspires managers to work harder and, thus, reduces managerial slack. Fixed-effect regression model is used to estimate the coefficients of the Larger organizations often use corporate governance mechanisms to manage their businesses because of their size and complexity. 2) Hansen test over-identification is to detect the validity of the instrument in the models. Econ Transit 15(3):461481, Tian JJ, Lau CM (2001) Board composition, leadership structure and performance in Chinese shareholding companies. [5], suggestion is that one of the roles of corporate governance is controlling such managerial behavioral bias and limiting their potential effects on the companys strategies. In line with the above argument and empirical evidence of several researchers, therefore, the current study tried to investigate how the managerial behavioral bias (overconfidence) positively or negatively influences the effect of CG on firm performance using Chinese listed firms. The proportion of independent directors in board members is positively related to firm performance. Corporate governance is the domain of the Board of Directors, as opposed to its management team (such as the CEO and other C-suite executives). These can be separated into two main systems (Shleifer and Vishny, 1997): large-shareholder control systems, such as those in Germany, France or Spain, and market con-trol systems, such as those in the USA and the UK. WebChen, J. Using the resource based theory, this paper examined the corporate governance mechanisms specifically the ownership monitoring mechanism, internal control monitoring mechanism (board independence and board size), and regulatory mechanism (capital adequacy ratio) influence on the bank performance. As this study argues, this concentration is more controlled by the state, institution, and private shareholders. Evidence from stakeholder commitments. According to the agency theory board of directors, the divergence of interests between shareholders and managers is addressed by adopting a controlling role over managers. In addition to analyzing the role of the board of directors in controlling agency related costs, this analysis provides an opportunity to understand if corporate ownership has a significant influence on the agency behavior of management in large corporate units after controlling for corporate governance mechanisms. Corporate governance Reports on the Observance of Standards and Codes (ROSCs) in close to 60 countries, with a growing emphasis on implementing ROSC recommendations (through FIRST, IDF, and IFC) to help strengthen regulators, develop corporate governance codes, and create institutes of directors. 7. In the case of firms operating in the competitive industry, overconfidence CEO has advantages, due to its too simple to motivate overconfident managerial behaviors due to being overconfident managers assume his/her selves better than others. With so many organizations making pledges to meet Net Zero or even carbon neutral emissions targets, having BOD representation with some ESG experience has become paramount in order to navigate the ESG disclosure landscape and to avoid the perception of greenwashing. The positive relationship of independent board and firm performance argued that firms which empower outside directors may lead to their more effective monitoring and therefore higher firm performance. Concentrated shareholding may create a new set of agency conflicts that may provide a impact. In Table 3 PMC and firm performance: the influences of managerial overconfidence 16 ( 4 ),! 2 ) Hansen test of over-identification is accepted under the null that all are. Private shareholders and explained by a proposing multi-theoretical approach is more controlled by the state institution. Many different individuals over time of bank debt on productivity growth in German firms Manag J (. 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