Sample Essay

Bhagat and Black (2002) find evidence that firms suffering from low profitability respond by increasing the independence of their board of directors, but no evidence that firms with more independent boards achieve improved profitability. Vafeas (1999) observes that the annual number of board meetings increases following share price declines. He further finds that operating performance improves following years of abnormal board activity.

Some other studies are in the ownership area. None of them provides support to the governance-performance relationship. Oyvind and Bernt (2001) discover that qualitative conclusions are sensitive to choice of instruments. Demsetz and Villalonga (2001) fail to find significant relationship between ownership and performance. What is more, Cho (1998) concludes that investment affects corporate value and in turn corporate value affects ownership but not vice versa.

Agrawal and Knoeber (1996) examine the use of seven mechanisms to control agency problems between managers and shareholders. These mechanisms are: shareholdings of insiders, institutions, and large blockholders; use of outside directors; debt policy; the managerial labor market; and the market for corporate control. The findings are consistent with optimal use of each control mechanism except outside directors. Closely following their approach, we construct a simultaneous equation system to investigate the influence of corporate governance scorecard on firm performance. Barnhart and Rosenstein (1998) investigate the combined effect of ownership structure and board composition on corporate performance. The results indicate that managerial ownership, board composition, and Tobin’s Q are jointly determined. Vafeas and Theodorou (1998) examine a broad group of board structure variables for U.K. firms. Contrary to expectations, the results reveal an insignificant relationship between board structure (percentage of non-executive directors, leadership structure, board ownership and committee composition) and firm performance.

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