The impact of corporate governance measures on firm performance: the influences of managerial overconfidence
The relationship between corporate governance and business performance continues to be a key topic for empirical and theoretical research in the field of corporate study. Over the past few decades, corporate governance has gained prominence and grown into a crucial mechanism. The rapid expansion of privatisations, the most recent global financial crises, and the creation of financial institutions have all contributed to the strengthening of corporate governance norms. Corporate performance is significantly enhanced by effectively managed corporate governance procedures.
Strong corporate governance is valuable to an organization in a number of ways, including how it enhances shareholder trust, lowers the risk of fraud, and improves company image. In order to achieve excellent corporate governance, it is built on a number of consistent mechanisms, including internal control systems and external environments. These mechanisms help business corporations grow successfully as a whole. The fundamental goal of corporate governance is to improve organisational performance by establishing and fostering initiatives that encourage corporate insiders to maximise both market and operational efficiency, as well as to promote long-term firm growth by limiting insiders’ access to resources that could be abused.
The influence of CG on business performance using various market trends has been studied by a number of researchers. Due to many contextual considerations, there is no agreement on how CG affects company performance, nevertheless. Many factors have an impact on the function of CG mechanisms. The effectiveness of the board of directors’ oversight is influenced by internal and external factors like governmental regulation and internal firm-specific factors, and the function of the board’s oversight is influenced by ownership structure and firm-specific characteristics, according to prior studies’ diverse empirical evidence, such as that found in . External market discipline affects the internal CG role on firm performance, according to reports by Boone et al, Liu et al., and Bozec.
Also, other research looked at the effect that various variables had in moderation. Mcdonald et al. investigated how the CEO’s experience affected the effectiveness of the board’s oversight as well as how product market rivalry affected the connection between within CG and firm success. As a mediator between the board’s decisions and corporate performance, Bozec researched market discipline. To the researcher’s knowledge, no study has taken managerial overconfidence into account while analysing the relationship between Governance mechanisms and firm corporate performance.
Therefore, this study uses Chinese listed enterprises to explore the role of managerial complacency in the link between CG mechanisms and firm performance. The monitoring of strategic decision-making was greatly helped by managers (CEOs). According to behavioural decision theory, overconfidence is one sort of cognitive bias that promotes decision-makers to overestimate their information and problem-solving skills while underestimating the uncertainties facing their organisations and the possible costs from litigation linked with claims against them. Different outcomes of the manager’s role in corporate governance were documented in several past research in various ways. According to earlier studies, overconfidence is a dysfunctional habit of managers that deals with negative effects on the firm’s success, such as value distraction through unproductive acquisitions, suboptimal investment behaviour, and illegal activities. Oliver asserted that the efficiency of corporate governance is influenced by the human nature of specific managers.
Directors’ capacity to accurately assess top managers’ managerial decision-making is primarily determined by their habits and experience. Another method that well-known managerial overconfidence might offset managerial risk aversion and result in poor investment choices is by encouraging some risk. According to Jensen, a manager may overinvest and accept a project with a net present value that is negative if there is free cash flow. As a result, the purpose of CG mechanisms is to diminish or completely eliminate the influence of subjectivity and asymmetric knowledge on CEO decisions. This indicates that the goals of CG mechanisms are to counteract the impact of such issues in corporate organisation that could have an impact on the long-term value of the firms. There is evidence of distortions, including the instance of business investment, even in the absence of agency conflicts and asymmetric information difficulties. Depending on their level of optimism and the availability of internal cash flow, managers will either overinvest or underinvest.
The agency theory developed by Jensen and Meckling provides a fairly clear understanding of the issues facing the business and the conflicting interests of shareholders and managers. Corporate governance is greatly hampered by management’s irrational behaviour as a result of executive managers’ behavioural biases. More agency conflict may result from overconfidence than from regular supervisors. It might influence both internal and external CG processes to make bad choices that lower business value. Agency costs, information asymmetry, and their impact on business decisions are the cause of the involvement of CG mechanisms in reducing corporate governance. So, the actions of overconfident executives may have an impact on the controlling and monitoring functions of internal and external CG mechanisms. One of the responsibilities of corporate governance, according to Baccar et al., is to restrict the possible impact of such managerial behavioural bias on the company’s strategies. These talks led to the conclusion that CEO optimism will have an impact on the links between CG and business performance, either positively or negatively.
The majority of studies in the realm of corporate governance focus on internal issues related to managerial opportunism and the misalignment of managers’ and stakeholders’ interests. The report provides an overview of research on this particular area of corporate governance in this section. The corporation may set up internal governance structures to address these issues. The internal control group (internal CG) consists of the shareholders, the company’s board of directors, and the company’s management. The controlling function is delegated by the shareholders to internal bodies like the board or supervisory board. Having effective internal CG is crucial for achieving corporate strategy. Internal mechanisms were broken down into boards, managers, shareholders, debt holders, employees, suppliers, and customers by Gillan to characterise them. The power of managers, shareholders, directors, and stakeholders is subject to internal controls at CG that serve to balance that authority.
Similarly, the primary internal corporate governance controlling methods recommended by various scholars in the literature include independent boards, CEO duality, and ownership concentration. In this study, internal control mechanisms that impact company performance were therefore deemed to include all three corporate forms. In addition, external CG mechanisms are those that come from outside the company and include things like legislation, debt financing, takeover provisions, market competition, and external audit. Several studies, particularly in developed countries, have looked into the impact of external CG practises on a company’s financial success. Debt finance and product market rivalry have been chosen as the study’s examples of external CG mechanisms. In order to simulate external factors, the study used internal CG measures including as independent boards, dual leadership, ownership concentration, product-market competition, and debt financing.
References:
https://www.emerald.com/insight/content/doi/10.1108/SRJ-09-2017-0176/full/html
https://fbj.springeropen.com/articles/10.1186/s43093-021-00093-6
Author Bio
