The Measurement Of Firm Performance Accounting Essay

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This research studies the relationship between corporate governance and firm performance. The corporate governance variables consist of Board structure and Corporate Reporting practices. These variables are regarded vital in influencing firm performance. The board structure referred to in this study includes separate leadership and combined leadership (CEO duality) , independent and executive directors (Director Ownership) and finally board committees. Corporate reporting includes financial reporting and CSR reporting.

The variables CEO Duality structure, a higher proportion of independent directors on the board and the existence of board committees are supported by agency theory. CSR reporting in this framework is supported by stakeholder theory. The variables that represent firm performance are Tobin's Q, ROA and ROE.

Tobin's Q is commonly utilised as a substitute for firm performance when analysing the association between firm performance and corporate governance, (Yermack,1996; Gompers, Ishii and Metrick, 2003). Share prices are influenced by corporate governance practices and voluntary disclosures, includes CSR reporting, which is reflected in the value of the shares. Better governance increases efficiency and productivity to the organisation, which means resources invested by owners are used more efficiently (Love, 2010). Consequently firms which are better governed are appraised more by investors leading to an increase in share prices, which shows that firm performance are reflected in prices of securities of quoted firms (Deegan 2004). The scope of this study is constrained to establishing the relationship between internal governance mechanisms and firm performance.

4.1 Hypotheses Development

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The hypothesis formulated in this research will be tested to examine the impact of corporate governance practices on firm performance in the Mauritian economy based on year 2011 data.

Hypotheses: The hypotheses of the this research are established on the ground that sound governance practices, that is, board structure and corporate reporting, may improve firm performance in Mauritius. The monitoring mechanism of the board composition (H1a), board leadership structure (H1b) and board committee (H1c) is depicted to explore the responsibility of the board towards shareholders through firm performance. Corporate social responsible reporting (H1d) shows the board's duty to other stakeholders and its effect on firm performance.

4.1.1 Board composition and firm performance

The composition of the board in this study describe the ratio of independent to executive directors occupying the seats on the board. The differentiation between the function of executive and independent directors is vital, since the latter brings specific merits and cons already explained in chapter 2, executive directors.

Board composition is regarded as a key corporate governance mechanism that influences firm performance in Mauritius. Best practice recommendations on corporate governance specifies boards to be constituted of a majority of independent, non-executive , directors (ASX Corporate Governance Council 2003, Cadbury 1992, Hampel 1998, OECD 1999). These requirements were also included in the code of corporate governance in Mauritius (NCCG 2004), since investors regard boards consisted of non-executive directors as an important factor of firm performance.

The relationship between board composition and firm performance was examined in chapter 2. According agency theory, independent are considered as the most key factor of the board structure that influences firm performance. Therefore, the conceptual framework considers the importance of non-executive directors in increasing firm performance in the context of Mauritius. In order, to test the above arguments the following hypotheses are suggested:

H0a: Majority of non-executive directors on the board is not related with firm performance.

H1a: A majority of non-executive directors on the board is positively related with firm performance.

4.1.2 Board leadership structure and firm performance

Taking into account, what has been mentioned in the literature review, leadership structure is an important aspect that affects firm's performance, because board leadership structure involves the monitoring of the CEO (Abdullah 2004; Dalton et al. 1998; Donaldson & Davis 1991).

By analysing the various empirical research in prior chapter, it was found that there is a relationship between board leadership structure and firm performance (Abdullah 2004, Rechner and Dalton 1989, Rechner and Dalton 1991). Therefore, according to the agency theory, the conceptual framework suggests that two individuals occupying the position of CEO and Chairman in important in affecting firm performance. To test the validity of this statement in relation to Mauritian context the following hypotheses are formulated:

H0b: Separate leadership structure is not related with firm performance.

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H1b: Separate leadership structure is positively related with firm performance.

4.1.3 Board Committees and firm performance

According to the agency theory, the monitoring task performed by board sub-committees is a crucial factor of corporate governance mechanism, taken into consideration in the conceptual framework, and in improving firm performance in the context of Mauritius. To test the validity the above arguments the following hypotheses are suggested.

H0c: Boards committee structures consisted of audit, remuneration and/or nomination committees are not related to firm performance.

H1c: Boards committee structures consisted of audit, remuneration and/or nomination committees are positively related with firm performance.

4.1.4 Corporate Social Responsibility and Firm Performance

Corporate social responsibility reporting (CSR) is regarded as a detrimental aspect of corporate reporting practices in affecting the firms' value in Mauritius, which is explained in the stakeholder theory. Prior studies have suggested a relationship between CSR reporting and firm performance. According to the stakeholder theory, CSR reporting activities of organisations influence the value of firm, which was considered in the conceptual framework in the context of Mauritius. To test the validity of the arguments put forward, the following hypotheses are considered:

H0d: Corporate social responsibility reporting is not related with higher firm performance.

H1d: Corporate social responsibility reporting is positively related with higher firm performance.