The influence of corporate governance practices on firm performance and efficiency: evidence from Jordan

The influence of corporate governance practices on firm performance and efficiency: evidence from Jordan

This study investigates whether corporate governance mechanisms influence firm performance and efficiency in developing countries, with a specific focus on Jordan. From 880 firm-year observations of non-financial firms listed on the Amman Stock Exchange, for the period of 2006-2016 and by using two measures of performance (i.e., return on assets and Tobin’s Q) and two measures of agency costs (i.e., asset utilization and expense ratio), the empirical results suggest that Jordanian companies with a high percentage of outside independent directors are outperforming companies with a low percentage of outside independent directors.

A significant positive relationship among the board independence in the form of the representation of outside independent directors, return on assets and the asset utilization ratio, has been found. The empirical findings of the relationship among board gender diversity, firm performance and firm efficiency, indicate that board gender diversity in the form of the proportion of women on the board of directors, cannot explain firm performance nor firm efficiency in Jordan. In addition, the findings of relationships among CEO duality, firm performance and firm efficiency, suggest that CEO duality as a proxy for the board leadership structure, can influence the firm performance positively and firm efficiency negatively.

The differences to the findings from the previous studies, refer to the fact that corporate governance and its problems in Jordan may not be similar to other countries. Jordan’s specific characteristics in terms of the data when compared with prior studies, means that ‘one size does not fit all’, and one group of governance mechanisms may not be fitted for each country. Drawing on the empirical investigations and theoretical discussions, it is revealed that the practices of corporate governance in Jordan need to be improved. Hence, a further aim of this thesis is to help regulatory bodies in improving or framing the best practices of corporate governance for Jordanian companies. Remarkably, the majority of the earlier studies on Jordan, have looked at corporate governance issues and performance by using traditional financial measures. To revisit the corporate governance practices in a unique setting of agency relationship in the context of Jordan, this study use two measures of agency costs, namely the expense ratio and asset utilization ratio.

Therefore, this study provides a new avenue of knowledge to academics and practitioners, by providing new evidence on corporate governance practices in a little known institutional context. This study has also been conducted by using two theories, and thus contributes to agency and resource dependence theory literature, showing the suitability of these theories during a period of improvement in the Jordanian corporate governance code for shareholding companies. This study is one of the rare studies which examines firm performance and agency costs by using different measures.