An Empirical Study On The Influence Of Efficiency Of Governance Structures On Corporate Performance

Corporate governance has a relatively long history in the U.S and Europe. The term first appeared in the 1960s but did not attract much attention in Asia at the time. Since the Asian financial crisis of 1997, the issue of corporate governance has become a subject of active policy and academic debate. In the academic field, a lot of effort has been devoted to examining the potential link between corporate governance structure and corporate performance.In 2004, the Organization for Economic Cooperation and Development (OECD) published the main principles for corporate governance. The principles pointed out the importance and necessary of establishing efficient governance structures. Establishing efficiency corporate governance structure benefits both ownership and investor. On basis the conclusion of former study literature such as the principal-agent theory, asymmetric information theory et al., combining of the developing environment of capital market of China, this research was conducted mainly to study the influence of the efficiency of governance structures on corporate performance by applying Data Envelopment Analysis (DEA) and Mixed-Effects Models.The empirical analysis proceeds in two steps. First, by using DEA, the analysis generates firm-specific efficiency scores which were measured for 622 sample firms in 5 years. The non-parametric linear programming technique, Data Envelopment Analysis, takes into account multiple-input variables and multiple-output variables associated with the efficiency of governance structures. No a priori assumption as to the analytical form of the production function is required in the DEA process. This made the study of this paper different from others, which implicitly rely on a specific production function. While a number of different dimensions of governance structure can be identified as the input variables, this paper emphasizes two key aspects: ownership concentration and capital structure. As a result of the presence of an effective corporate governance system, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth. Thus, investment and revenue growth were identified as the firm's output variables.In the second step, by using mixed effects models, the DEA efficiency scores are used as explanatory variables in a panel data analysis of corporate performance. Mixed-effects models provide a powerful and flexible tool for analyzing panel data, Mixed-effects models incorporate both fixed effects, which are parameters associated with entire population, and random effects, which are associated with individual experimental units. Thus, in contrast to previous research on the relationship of governance structure and corporate performance, the results are more reliable or robust. To measure corporate performance, both market performance based and accounting based performance are used. The variables of market based measures are Tobin's Q and market-to-book ratio. ROA is properly used as the variable of accounting based measure.Controlling for the firm size and market concentration ratio, the influence of efficiency scores of corporate governance on Tobin's Q was inconsistent or not stable, but the efficiency scores indeed has a significant influence on market-to-book ratio (modified Tobin's Q). At last, this paper examines the relationship between DEA scores and profitability, the results from the panel data analysis suggest that the efficiency of governance structure contributes significantly to explaining ROA. The main practical implication of these findings is that corporate performance should be grounded in the efficiency of corporate governance structure. Real changes in corporate performance may require real changes in the efficiency of governance structure.