Chapter 4: Corporate Governance and Corporate Performance
INTRODUCTION 4.1 The aim of this chapter is twofold. First, there will be a discussion of the theories and empirical evidence on the link between various corporate governance devices and corporate performance. Second, this will be followed by an assessment as to how bad corporate performance can be corrected via corporate governance devices and actions. However, in order to address these two aims, one needs to define corporate performance first. As we shall see in the next section this is not as straightforward a task as it may seem at first sight. Given that there is now a vast body of literature on corporate governance and corporate performance, this review does not claim to survey all the available literature, but rather chooses to concentrate on the main theoretical and empirical studies. 4.2 DEFINING AND MEASURING CORPORATE PERFORMANCE There are at least three types of corporate performance measures. The first type covers accounting measures of performance and the second type is stock performance. Whereas these two types of measures focus on returns to the providers of finance – shareholders as well as debtholders – to a corporation, there is also a third type of corporate performance measure which focuses on value creation (or value destruction in some cases) for stakeholders other than the shareholders and debtholders. We will now review each of these three types. 4.2.1 Accounting Measures of Performance1 The main advantage of accounting measures of performance is that they measure actual performance, i.e. performance which has already been achieved. Conversely, share...
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