Content area
Full text
1. Introduction
A firm’s corporate governance (CG) practices are determined by an interplay of myriad internal and external factors. Internal factors include board and corporate charters (Gillan et al., 2003), nature of agency problems faced by the firm (Tuschke and Sanders, 2003) and ownership of the firm (Barucci and Falini, 2005; Borisova et al., 2012; Chen et al., 2006; Lemmon and Lins, 2003). External factors include firms’ industry affiliation (Agrawal and Knoeber, 2001; Gillan et al., 2003; Johnson et al., 2009) and country of operation (Sarhan and Ntim, 2018). These internal and external factors work together to influence the CG practices in firms. For example, ownership and industry factors together affect the board composition (Agrawal and Knoeber, 2001). As an effective board alleviates agency issues (Belikov, 2019; Dutra, 2012), many CG solutions center around having effective boards to monitor the management (Fama and Jensen, 1983), separating the role of chairman from the chief executive officer (CEO) (Eisenhardt, 1989; Fama and Jensen, 1983) and having performance-based executive compensation (Baker et al., 1988; Jensen and Murphy, 1990).
Out of all the internal and external factors, ownership is considered the most critical factor influencing CG firms (Jensen and Meckling, 1976; Tuschke and Sanders, 2003). Ownership, being intrinsically related to agency costs, is central to understanding CG (Fama and Jensen, 1983; Shleifer and Vishny, 1997). When ownership is concentrated, the owner has an incentive and capacity to discipline managers, thereby mitigating the principal-agent conflicts (Anderson and Reeb, 2003; Davis et al., 1997; Fan et al., 2011).
Past literature also establishes industry, part of the external environment in which a firm operates, as a dominant factor in explaining CG in firms (Gillan et al., 2003). Firms in industries that require lower capital expenditure and do not need to raise capital frequently from the external capital market may not care much for the discipline or CG requirement that the external capital market expects from firms (Khanna and Palepu, 2004). Also, agency cost in “managerial slack” is either absent or less relevant in competitive industries (Giroud and Mueller, 2011, 2010). This leads to differences in CG practices followed in competitive and non-competitive industries. Some of the determinants of CG such as leverage and...