The Effect of Corporate Governance on Firm Performance in Jordan

Abstract

Due to widespread corporate scandals and failures around the world, there has been a renewed interest in the effect of corporate governance on firm performance. The majority of research concerning corporate governance and its effect on firm performance has been undertaken in developed countries and markets, particularly the UK and the US, but relatively little evidence is provided in the Middle East, specifically Jordan. This study investigates the effect of the corporate governance on firm performance of the Jordanian industrial and services companies during the period 2000 to 2010.
This study primarily employs the agency theory to investigate the relationship between corporate governance and firm performance. The agency theory is concerned with the agency problem between principals and agents (i.e. shareholders and managers, respectively), which undermines value maximization. It has been argued that the board
of directors, ownership concentration and managerial ownership are efficient corporate governance mechanisms to solve the agency problem between shareholders and management.
Multiple regression panel data analysis is the main tool of analysis in this study. The statistical method used to test this impact is Generalised Least Square (GLS) Random Effects
models. The study is based on the three sets of data: (1) a sample of 115 firms listed in the Amman Stock Exchange; (2) corporate governance data collected from Osiris database; and (3) data generated through the annual reports of the firms.
Empirical investigation reveals a mixed set of results. Our findings fail to reveal any significant impact for the board size on firm performance. However, CEO duality tends
to have a positive effect on the firm performance, which indicates that the Jordanian firms perform better if the chairman and the CEO roles are combined in a single
individual. It was also found that NEDs have a negative impact on firm performance, which is inconsistent with the monitoring hypothesis of agency theory, which holds that
the NEDs play an important role in the board as a source of experience, monitoring services, reputation and expert knowledge with the likelihood to improve firm performance. Furthermore, our findings report positive and negative impacts of managerial ownership and ownership concentration on firm performance (respectively).
Finally, our findings reveal a positive relationship between foreign ownership and firm performance.