Evaluation of Corporate Governance Influence on Performance of roumanian Companies Ph. D Professor Georgeta VINTILǍ Ph.D.Student Floriniţa DUCA The Bucharest University of Economic Studies, Romania Abstract The main purpose of this study is to examine the impact of the corporate governance mechanism on financial performance of the company. Previous research, largely conducted using international data, has suggested that better governed firms outperform poorer governed firms in a number of key areas. In this paper the authors studied the correlation between corporate governance, measured as an index of corporate governance and corporate performance on a representative sample on Bucharest Stock Exchange listed companies in Romania. Empirical study results are partially consistent with those of previous studies in the literature. Key words: corporate governance, financial performances, size, CEO duality, leverage J.E.L.: C10, G10, G30, G34. 1. Introduction Corporate governace is a the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (http://www.businessdictionary.com/). Corporate governance refers to the way in which a corporations is directed, administered, and controlled. Corporate governance concerns the relationships among the various internal and external stakeholders involved as well as the governance processes designed to help a corporation achieve its goals. Of prime importance are those mechanisms and controls that are Revista Română de Statistică - Supliment nr. 1/2015 47
designed to reduce or eliminate the principal-agent problem. (Baker and Anderson, 2010) Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.( Cadbury, 2000). Financial performance enables Measuring the results of a firm's policies and operations in monetary terms. These results are reflected in the firm's return on investment, return on assets, value added, etc. (www.businessdictionary.com/) The relationship between corporate governance and financial performance incited both academic world and policymakers in recent years. There exists a well number of evidence of a link between corporate governance practices and firm performance. But the empirical studies mainly focus on specific dimensions or attributes of corporate governance like board structure and composition; the role of non-executive directors; other control mechanisms such as director and managerial stockholdings, ownership concentration, debt financing, executive labor market and corporate control market; top management and compensation; capital market pressure and short-termism; social responsibilities and internationalization. Gompers et al (2003) classify 24 governance factors into five groups: tactics for delaying hostile takeover, voting rights, director/officer protection, other takeover defenses, and state laws. They use Investor Responsibility Research Centre (IRRC) data and findings show that firms with stronger shareholders rights have higher firm value, higher profits, higher sales growth, lowest capital expenditures, and made fewer corporate acquisitions. Javed and Iqbal(2007) investigated whether differences in quality of firm-level corporate governance can explain the firm-level performance in a cross-section of companies listed at Karachi Stock Exchange. They analysed the relationship between firm-level value as measured by Tobin s Q and total Corporate Governance Index (CGI) and three subindices: Board, Shareholdings and Ownership, and Disclosures and Transparency for a sample of 50 firms. The results indicate that board composition and ownership and shareholdings enhance firm performance, 48 Revista Română de Statistică - Supliment nr. 1/2015
whereas disclosure and transparency has no significant effect on firm performance. 2. Data and Methodology The aim of this study is to investigate the effect of corporate governance on liquidity. The data were sourced from the Annual Reports and Accounts of the random sample of 10 firms listed on the Bucharest Stock Exchange over the 2006-2013 interval. Analysis does not include the companies operating in financial sector due to their different financial structures. Measuring corporate governance In order to evaluate the quality of corporate governance of roumanian companies, corporate governance assessment model was created. The weighting is in the construction of index is based on subjective judgments. The assigned priorities amongst and within each category is guided by empirical literature. The model consists of four sets of factors (Access to information, Board Structure, Shareholders' rights, The existence of advisory committees) defining the quality of corporate governance. The maximum score a company can get is 21, which is obtained by summing up all points in each segment. Size Size is considered a key factor that can influence the financial structure of the firm. Firm size has been suggested to be an important variable related to the leverage ratios of the firm. The variable Size of Firm is measured as logarithm of total assets. Leverage As it can be seen in the literature, various definitions of leverage exist. All these characterizations of leverage revolve around some form of debt ratio. The definitions depend on whether market value or book values are used. In addition, definitions also depend on whether short term debt, long-term debt or total debt is used. Firms have several types of assets and liabilities and there can be further adjustments made to the definition. Leverage: Represents the value of debt divided by book value of total asset. Return on asset measuring the operating profitability of a (nonfinancial) firm, expressed as a percentage of the operating assets. ROA indicates a firm's ability to efficiently allocate and manage its resources but ignores the firm's liabilities.(www.businessdictionary.com). Revista Română de Statistică - Supliment nr. 1/2015 49
The relation between corporate governance and return on asset(roe) is estimated using the fixed effect panel regression. Our empirical model is specified as: ROE = β0 + β1*cgi + β2*size + β3*leverage 3. Results and discussion Descriptive analysis are presented in Table 1. Table 1- Descriptive statistics of the variables in the study ROA CGI Leverag e Size Mean 0.0409 14.6609 0.2812 19.4894 Median 0.0392 15.0000 0.2281 19.0477 Maximum 0.5001 21.0000 1.2861 24.3811 Minimum -0.6934 9.0000 0.0048 16.1545 Std. Dev. 0.0999 2.8619 0.2402 1.7860 Table 1 provides a summary of the descriptive statistics of the dependent and explanatory variables. As shown in Table 1, average return on asset of the firms listed in Bucharest Stock Exchange and reviewed in scope of the analysis is 0.0409. The mean leverage of the firms is 0.2812 with a maximum of 1.2861. The average corporate governance index (CGI) is 14.6609, with a standard deviation of 2.8619. The average on size is 19.4894 with a maximum of 24.3811. Results of regression analysis Table 2: Results of Regression Analysis Dependent Variable: ROA Method: Panel Least Squares Total panel (balanced) observations: 174 Variable Coefficient Std. Error t-statistic Prob. IGC 0.0031 0.0027 1.1580 0.2485 LEVERAGE -0.1692 0.0291-5.8019 0.0000 SIZE -0.0080 0.0044-1.8083 0.0723 C 0.1997 0.0752 2.6560 0.0087 R-squared 0.2046 Durbin-Watson stat 0.7826 Adjusted R-squared.1906 F-statistic 14.5846 Prob(F-statistic) 0.0000 50 Revista Română de Statistică - Supliment nr. 1/2015
The results of estimating equation are reported in Table 2.The model explains almost 20% of variation in return on asset, with significant F- statistic. Thus, we can say that based on p-values, in our model for listed companies, leverage and size is statistically significant, is 0.000(sig. < 5%) and 0.0723(sig. <10%). This is consistent with the argument that managers of highly-levered firms face greater levels of accountability and need to increase operating efficiency in order to be able to timely discharge the debt obligation. The index of corporate governance is positiv correlated with return on asset (0.2485; Table 2) but it is statistically insignificant. Conclusion Aim of this research was to explore the impact of corporate governance on return on asset. This research observed a 29 firms listed over the 2008-2013 interval at the Bucharest Stock Exchange. Beside corporate governance variable the analysis included some other variables such as leverage and size. The study contributes to the current corporate governance literature by providing evidence of a relationship between governance and performance. However, the results of this study are subject to some limitations. Corporate governance is a vast concept and is difficult to measure with objectivity and hence measure used in this study may be subjective and not a comprehensive measure. References Baker, H. and Anderson, R., Corporate Governance: A Synthesis of Theory, Research, and Practice, 2010. Cadbury, A., Global Corporate Governance Forum, World Bank, 2000. Coles, J. W., V. B. McWilliams, and Sen N. (2001) An examination of the relationship of governance mechanisms to performance, Journal of Management, 27. Duca, F., Does Corporate Governance Affect Firm Liquidity? Empirical Evidence from Romania, Romania statistical review suplement, 10/2014. Gompers, P., Ishii L., and Metrick A., Corporate Governance and Equity Prices, Quarterly Journal of Economics, 2003. Javaid, A. Y., and Iqbal, R., The Relationship between Corporate Governance Indicators and Firm Value: A Case Study of Karachi Stock Exchange, Pakistan Institute of Development Economics (PIDE) Working Papers and Research Reports, 2007. Revista Română de Statistică - Supliment nr. 1/2015 51