Academic journal article International Management Review

The Impact of Corporate Governance on Firm Performance: Evidence from Bahrain Bourse

Academic journal article International Management Review

The Impact of Corporate Governance on Firm Performance: Evidence from Bahrain Bourse

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Many researchers have carried out studies to identify corporate governance, focus on its characteristics, and determine how these characteristics impact the performance of the entire firm. Studies found many answers related to research queries by providing a clear definition of good corporate governance. Studies also examined the ethics and procedures used to manage and monitor the performance of a business. The goal of most of these studies was to examine the relation between corporate governance mechanisms and performance measures.

After the collapse of Enron and the corporate scandals that have been ongoing since October 2001, the confidence of marketplace shareholders began to shake. In response to this erosion, many investors, boards of directors and government regulators have encouraged businesses to emphasize corporate governance from different sides. These different sides include accounting and finance, economies, law, and management.

In addition to these divergent factors, countries and economies differ regarding what governance mechanisms they should use to attain the best results. For instance, the majority of Taiwan businesses are owned by families; however, in Anglo-American economies, the equity market is the most popular means of ownership. Still, when considering the best way to structure a firm, whether the firm is in Asia, Europe or USA, it is of the utmost importance to implement the correct governance mechanisms. This will aid any business in the process of decision making.

Given the factors that go into structuring a business, and the cultural differences that can exist between economies, countries, business founders and investors, it is extremely difficult to define corporate governance. A review of the literature shows that there is no universal definition. For the purposes of this paper, we will define corporate governance as "the system by which companies are directed and controlled" (Cadbury Committee, 1992). This is the most broadly used definition in business literature. There are few studies which examine the effect of corporate governance on performance measures in the Global Council Cooperation (GCC) business environment. This paper may be the first to do so in Bahrain. Bahrain is one of the fastest growing global economies. Its government is keen to support good corporate governance mechanisms in hopes of increasing investor confidence and encouraging market improvement.

This study provides empirical evidence from Bahrain about the impact of corporate governance on a typical company's performance measures .Bahrain is one of most unique and attractive marketplace in the region, mainly because it provides great opportunities for more investment flows. This paper is a contribution to previous studies that investigate the effect of corporate governance practices among performance measures for the entire firm. The paper will also aid stakeholders in proposing the proper organizational structure of a firm. The paper will help to differentiate between firms with effective and ineffective corporate governance policies. Effective corporate governance has the goals of building marketplace confidence and attracting positive investors in the organization. The main objectives in this study are to

* Determine a means of distinguishing between effective and ineffective corporate governance,

* Demonstrate the effect of corporate governance practices on a firm's financial sector performance,

* Increase the awareness on agency theory and its relative costs,

* Illustrate the Bahraini market generally and the Bahrain Bourse specifically.

Literature Review

Many studies from around the world have investigated the impact of corporate governance variables on firm performance. Certain studies from other countries are useful to review in understanding and informing the current study. Sayla Siddiqui (2014) investigated the effect of corporate governance characteristics on firm performance based on 25 previous research studies. …

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