CORPORATE GOVERNANCE AND FIRM PERFORMANCE IN SINGAPORE

Abstract

Corporate governance is an important topic to investors, management and academics. While a growing number of empirical literature has emerged to examine whether different corporate governance structures influence executive behavior and thus have an impact on firm performances in the U.S. and U.K., limited research has been conducted along this line in Singapore. This preliminary research investigates the relationship between corporate governance and firm performances in Singapore‘s unique context for 681 SGX-listed companies. Firm performances are measured by operating performance, market valuation and stock return, while corporate governance is measured by both a composite index, the Governance and Transparency Index (GTI), and two specific aspects of governance including board matters and ownership concentration. GTI‘s announcement effect is also studied to understand perceived benefits of better governance practices by investors. Firstly, the results consistently exhibit a positive relationship between GTI score and operating performances measured by ROE and ROA for the contemporaneous year at the 99% significance level. A relationship between GTI score and Tobin‘s Q at the significance level of 99% and 95% for year 2009 and 2008 is also established, respectively. Interestingly, as opposed to the positive relationship found for operating performances, a constantly negative relationship is present between governance index score and Tobin‘s Q. However, a significant and constant relationship is absent between GTI score and both contemporaneous and future stock returns. Secondly, the findings on the two aspects of corporate governance exhibit positive relationship between board size and ROE, at a significance level of 90% and 95% for year 2009 and 2008 respectively. Board size also has an impact on Tobin‘s Q and contemporaneous stock return in year 2008. Generally, other board matters such as the board independence ratio and whether board chairman is in management do not exhibit a statistically significant relationship with firm performances of the concurrent year. We also find that ownership concentrations measured by the cumulative shareholding percentage held by the largest, 3 largest, 5 largest and 10 largest shareholders have no statistically significant effect on firm performance. Lastly, for GTI2009, it is found that the announcement of score does not have any impact on the short-term stock return measured around the announcement day. For GTI2010, the results show that at 90% significance level, a score improvement is positively related with the cumulative return measured over a 10-day span around the announcement. However, this finding is not supported by CAR measurement over other time spans. Thus, generally, the GTI announcement effect is minimal.