title: An investigation of corporate governance mechanisms and value creation in the United Kingdom
Creators: name: El-Faitouri, Ramadan
Publisher: name: University of Liverpool Repository
Year: 2023

description: Corporate governance refers to the set of mechanisms that affect the decision-making process taken by managers of quoted firms where the ownership and control are separate. The impact of corporate governance on corporate performance has been the main theme of research in accounting and finance at least since Jensen and Meckling (1976) published their work. Typically, empirical studies investigate whether different corporate governance mechanisms have an impact on directors' behaviour or corporate performance. However, corporate governance studies are complicated by the endogenous relationship that exists between control forces such as capital markets-the-regulatory system, factor markets, and internal governance mechanisms operating on a company and its decisions. This implies that the findings of empirical studies are questionable if these studies do not deal with endogeneity problems. A considerable number of empirical studies suggest that certain corporate governance mechanisms improve corporate performance, but those studies are affected by endogeneity issues. Roberts and Whited (2011) state that "endogeneity leads to biased and inconsistent parameter estimates that make reliable inference virtually impossible". The main purpose of this study, therefore, is to respond to these endogeneity concerns by using a well-developed generalised method of moments regression model (GMM) developed by Wintoki et al. (2012). The study examines the relationship between the board of directors' structure and corporate performance. Specifically, it investigates whether the presence of non-executive directors, duality, board size, director ownership, and the presence of board sub-committees have an impact on corporate performance. In addition, it also develops a governance index to find out whether the level of compliance with corporate governance regulations has an impact on corporate performance measured by ROA and Tobin's Q. To investigate these issues, the study adopts a comprehensive strategy which consists of three regression models, namely ordinary least square (OLS), fixed-effects model (FE), and generalised method of moments (GMM). Data for the analysis are extracted from annual reports, BoardEx database and Datastream databases for the period 1999 - 2009. The final sample includes a total of 634 UK firms listed on the London Stock Exchange. The results indicate that the level of compliance with corporate governance regulations and board structure are both partly determined by past corporate performance. After controlling for this, the results show that there is no relationship between current board of directors' structure and corporate performance. Further, the level of compliance with the recommendations of corporate governance has no impact on profitability measured by ROA. The results further reveal that the level of compliance with the Combined Code on Corporate Governance also has no impact on Tobin's Q as a proxy of corporate performance. These findings are inconsistent with many prior empirical studies and policy recommendations on corporate governance, which suggests that corporate governance mechanisms develop corporate performance. In addition, the findings indicate that the results of the earlier corporate governance studies that do not take into account the dynamic nature of corporate governance may be affected by bias.