Corporate Governance Mechanisms

and Firm Performance: A Survey of Literature

Manpreet Singh Gill*, T Sai Vijay** and Subhash Jha***

The literature on corporate governance identifies three prominent corporate

governance mechanismsboard, disclosures and ownership structure. However, there
is no unanimity among the researchers about the effect of these mechanisms on
corporate performance. The attempt is to survey the literature on the relationship
between corporate governance mechanisms and firm performance. One finds that
while literature agrees on the positive relationship between disclosure and firm
performance, it is inconclusive on the relationship between board characteristics
and firm performance. Similar is the case of the relationship between ownership
structure and firm performance. One also finds that most of the work in this regard
was done in the context of developed countries.

Introduction
Berle and Means (1932) predicted the evolution of corporations with diffused ownership and
control concentrated in the hands of the professional managers. The prediction came true but
the separation of ownership and control brought certain problems along with it. The problem
and the associated costs are well explained by Jensen and Meckling (1976), according to whom,
the owners also called as principals, enter into a contract with the agents (i.e., managers) in
order to engage them to run the organization on the behalf of the owners. As both, the agents
and the principals are utility maximizers therefore, there are possibilities that the managers may
not function in tune with the interests of the owners or shareholders. This problem with this
contract is termed agency problem and the costs associated with this problem, agency costs.
The agency problem has also been highlighted by Shleifer and Vishney (1997), according to
whom, a manager borrows money from the financiers or from the shareholders to put them
for productive use. The financiers, in order to ensure that their money is properly utilized, enter
into a contract with the managers, because the contract cannot be a complete contract as the
residual rights lie with the managers. These residual rights give them the discretion to act the
way, they want to. It is therefore possible that they can act against the interests of the financiers.
Therefore, it is essential to reduce the managerial opportunism to the maximum extent possible.
Hart (1995), Shleifer and Vishney (1997) presented a few mechanisms, called as corporate
* Research Scholar, IIMT, IBS, Hyderabad, India. Email: manpreetgill1981@yahoo.co.in
** Research Scholar, IIMT, IBS, Hyderabad, India. E-mail: tsaivijay@gmail.com
*** Research Scholar, IIMT, IBS, Hyderabad, India. E-mail: subhashjha.iimt@gmail.com

2009 IUP.Governance
Corporate All Rights Reserved.
Mechanisms and Firm Performance: A Survey of Literature 7
governance mechanisms to curb or deal with agency problems and managerial opportunism.
Research has suggested that corporate governance mechanism deals with the ways in which
capital providers guarantee to firms of getting a return on their venture, (Shleifer and Vishney,
1997). They also propose that the corporate governance came into picture basically, for
supporting and protecting the investors from the agents, that is, to reduce agency costs.
Cadbury committee (1992) defines corporate governance as a system by which companies
are directed and controlled. OECD (2004) defines it as a set of relations among a firms
management, its board, shareholders and stakeholders, which is one of the key elements that
improves a firms performance, and the fluctuation of capital markets, stimulating the innovative
activity and development of enterprises.
Dennis and McConnell (2003) also argue in their paper that, to overcome problems in
corporate governance, different mechanisms can be applied. These mechanisms can be internal
or external, where internal mechanisms operate through the board of directors, ownership
structure (managerial ownership). Some of these mechanisms are: board of directors, ownership
concentration and disclosure. However, whether these mechanisms actually serve the purpose
of protecting the principles and creating value for them, needs to be researched. The value
creation can be measured through the performance of the firm. In this paper, we review the
literature on the relationship between the three major corporate governance mechanisms
namely, board, disclosure and ownership and the firm performance.

Board Characteristics and Firm Performance

According to Perry and Shivdasani (2005), board of directors is one of the most important
mechanisms used by the shareholders to monitor management. They state, Charged with
hiring, evaluating, compensating and ongoing monitoring of the management, the board of
directors is the shareholders primary mechanism for oversight of managers. As the board of
directors is one of the most important mechanisms to check the erring management, several
studies have been conducted to see how the characteristics of the board can control
management and therefore enhance the performance of the firm. However, there is no
consistent evidence regarding this relationship. Some studies found a positive relationship
between board characteristics and firm performance, some report no relationship while, some
other studies report a negative relationship between the board characteristics and firms
performance. This inconclusiveness is highlighted by Finegold et al. (2007) in their review on
corporate boards and company performance.
Goodstein et al. (1994), while studying the effects of board size and diversity on strategic
change, mentioned three functions which a board can undertake. According to them, a board
performs an institutional function in which it links the firm with the external resources.
Secondly, the board can act as an important mechanism to check managerial opportunism and
lastly, the board performs a strategic role by involving itself in strategy formulation.
Later, Hillman et al. (2000), while analyzing how the composition of the board can change with
the change in the environment, differentiated between agency role of the board of directors

8 The IUP Journal of Corporate Governance, Vol. VIII, No. 1, 2009

and resource dependence role of board of directors. Agency role of the directors mainly
focuses on monitoring and ratifying the management decisions in order to reduce the agency
problems, which arise due to the separation of ownership and control. On the other hand, as
per the resource dependence view, the board of directors links an organization with the
external public resources.
Judge and Zeithmal (1992), while conceptualizing the boards response towards increasing
pressure for its involvement in the decision-making, hypothesized that the boards involvement
is positively associated with the firms performance. Hillman et al. (2000) highlighted the
resource dependence role of the board and said that the board can link the firm with the crucial
resources present in the external environment of the organization, thus reducing uncertainty
and the transaction cost associated with these resources, which can give an organization a cost
advantage over its rivals. Apart from this, the board members can provide other resources like
important information or knowledge and legitimacy to the organization. All the resources
provided by the board are crucial for the success of the organization and act as the lifeline
for its existence. Thus, we can say that these resources can enhance the performance of the
organization. Extending this argument a little further, one can say that because these resources
are provided by the board, the board can enhance the performance of the firm.
He J and Mahoney J T (2006) investigated whether corporate governance mechanisms, in
general, and board of directors, in particular, affect the firm level competitive behavior. They
argued that managers have their own economic self-interest which can be in conflict with the
shareholders. As a result, the managers could end up making sub-optimal strategies.
If corporate governance mechanism is in place, managers will make optimal strategic policies,
which can lead to sustainable competitive advantage. They further said that board of directors
is the most important source of corporate governance mechanism. The authors argued that the
board of directors can influence both the motivation and the capability of a firm to respond
to a competitive move, where capability means the resources of the firm and motivation means
the tendency to remain aligned with the interests of the shareholders. The non-board
components of corporate governance, on the other hand, are motivation alignment
instruments. The authors suggested that there is a positive relationship between the presence
of a firms capabilities and its competitive behavior but this relationship is moderated by
corporate governance mechanisms. Moreover, there is a positive relationship between
competitive behavior and firms performance. As the board of directors has the ability to
directly influence the firms capability, they can influence the firms competitive behavior and
hence the firms performance. So, it can be said that the board is positively related to firms
performance.
Barney (1991) gave the resource-based view of the firm, according to which, a resource
could be considered as a competitive advantage if it is rare, creates value for the firm, inimitable
and not easily substitutable. Making use of this resource-based view of the firm, Erakovik and
Goel (2008) investigated the relationship between the board and the management and how this
relationship can provide a competitive advantage to a firm, in comparison to other firms.
The authors argued that in case of the firms where the board of directors are more involved

Corporate Governance Mechanisms and Firm Performance: A Survey of Literature 9

in acquiring the knowledge and provision of the resources, it will lead to exchange of
information both inside and outside the board room, which will result in a more open and
collaborative relationship between board and the management and will build up a unique
corporate governance structure which will act like a resource for the firm. They also suggested
that the board of directors is like a resource for an organization, by virtue of their capability
to provide expert advice on strategic issues, their valuable links with the external environment
and sometimes their reputation. And it is for these reasons that the board of directors are
sought for. The types of resources which a board can provide to the firm satisfies the criteria
mentioned by Barney (1991), which is to be considered as a resource that can provide
competitive advantage to the firm. Therefore, it could again be argued that the board can
enhance the performance of the organization.
Chahine and Filatochev (2008) examined the effect of information disclosure and board
independence on Initial Public Offering (IPO) discount. IPO discount was defined as, the
difference between the IPO issue price and intrinsic value of the firm. It was found in the study
that IPO discount is negatively associated with the board independence. IPO discount was also
found to be negatively associated with the disclosure of information but up to a certain point.
It was found that as more and more information was disclosed, it was thought by the investors
that it is an attempt by the management to impress them and induce them to purchase their
shares.
Raheja C G (2005) in her study on determining optimal board size and composition, derived
a model which was based on the fact that the outside board members verify the project because
their reputation is at stake, whereas the inside members provide the information to the board
members about the bad projects because they have an incentive of CEO succession.
The model predicted the optimal board size and composition under various conditions.
For, instance, the model could tell the optimum size and composition of the board when the
verification of projects costs are high and as verification cost varies with the type of industry,
the composition and the size of the board change with the change in industry characteristics.
Moreover, the model could also tell the composition and the size of the board when the private
benefits to the inside board members are high or low. Moreover, the author was able to predict
the board size and composition for which the probability that a bad project will be passed is
low. When the probability of passing the bad project will be low, good projects will be passed
which will directly affect the performance of the firm. Therefore, it can be said that board size
and composition could affect the performance of the firm.
Warther (1998) reconciled the two opposing views regarding the effectiveness of the boards.
One view points out that a board is ineffective if there is no dissent in the board and the other
viewpoint focuses on the disciplining effect of the board. The author reconciled the two views
by saying that the board may appear passive but it cannot be called ineffective. Moreover, it
was shown that there is reluctance among the board members in voting against the
management but once an initiative is taken by somebody, it results into a bandwagon effect.
It was assumed in the paper that board effectiveness is positively related to the expected value
of the firm and the expected value is negatively related to the ejection penalty. If the ejection

10 The IUP Journal of Corporate Governance, Vol. VIII, No. 1, 2009

 penalty is high, it will mean less expected value of the firm or less board effectiveness.
Therefore, it is important to shield board members from the ejection penalty. In other words,
it means making the board more independent. So, it can be said that the independence of the
board is positively related to a firms performance. It was also argued that the board will be
effective when it possesses more information. It will have more information when more outside
directors are available on the board. This has implication for the composition of the board.
Thus, the study clearly indicates the relationship between the performance of the firm and
board characteristics like composition and compensation.
Klein A (2002) studied the relationship between the characteristics of audit committee and
the board with earnings management. Earnings management was defined by the author as,
the practice of distorting the true financial performance of the company. In the study,
management earnings was captured using abnormal accruals as proxy. It was found that there
is a negative relationship between the audit committee independence and abnormal accruals.
And, it was also found that there is a negative relation between the board independence and
abnormal accruals. Further, it was found that if the number of independent directors on the
board or the number of independent directors in the audit committee decreased, there was an
increase in the abnormal accruals. Therefore, it can be concluded that the independence of the
board and audit committee can increase the boards effectiveness which can improve the firms
performance.
An empirical study was conducted by Adjaoud et al. (2007) to see the effect of the boards
quality on the firms performance. They defined board quality in terms of characteristics like
board composition (which included board independence and audit committee), board
compensation and disclosure issues (how the company discloses the information about its
board). The board quality was calculated by giving marks to each of the board characteristics
mentioned above and then summing the marks across all the characteristics. The study found
no significant relationship between board characteristics and performance when traditional
performance measures like Return On Assets (ROA), Return On Investments (ROI), and Earnings
. Per Share (EPS) were used. However a significant relationship was found between the board
characteristics and performance, when performance was measured in terms of market value
added or economic value added. Another study was conducted by Perry and Shivdashini (2005)
to see whether boards affect the performance of the firms. In the study, the effect of the board
on the restructuring activities (i.e., activities which are carried during the period of their low
performance in order to take the firm out of crisis) was considered. Ninety-four low performing
companies were studied and it was found that when the outside directors were in majority, the
likelihood that restructuring activities will be carried out is high and moreover, subsequent
improvements were found in the performance of the firms after restructuring. Therefore, it can
be said that board affects the performance of the firm. Another study was conducted in the
Netherlands by Van et al. (2008) to see the relationship between board characteristics and firms
performance. Characteristics like board size, board composition and board remuneration were
considered for the purpose of the study. The standardized arithmetic average of ROA, sales,
equity and market-to-book ratio was used as indicators of performance. It was found that the
size of the management board has no impact on performance, size of the supervisory board

Corporate Governance Mechanisms and Firm Performance: A Survey of Literature 11

has negative impact on performance, and also the number of outsiders negatively impacts
performance. Moreover, it was found that equity ownership by management board and
supervisory board does not affect performance. Lastly, it was found that the remuneration of
the supervisory board has no relation with performance, whereas the remuneration of the
management board was found to have a slightly positive relation with performance.
A study was conducted in the Indian context by Ghosh (2006) to see if the board
characteristics affect a firms performance. The characteristics considered in the study were
board size, number of non-executive members and board remuneration. On the other hand,
three indicators of performance were used. One is PERF, which is the arithmetic average of ROA,
ROE and ROS. The second was adjusted Tobins Q and the last indicator was ROA. It was found
that the size of the board is negatively related to a firms performance, irrespective of the
performance measure used. Secondly, it was found that board composition has no significant
relationship with performance irrespective of the performance measure used. Lastly, it was
found that remuneration of the CEO positively impacts performance, when PERF was used as
the performance indicator. For other performance measures, the relationship was insignificant.
Garg (2007) also conducted a study in the Indian context to see if there is any relationship
between the characteristics like board composition, its size, board independence and the firms
performance. Performance indicators like Tobins Q, market adjusted stock price, sales to assets
ratio and operating income to assets ratio were used. It was found that there is an inverse
relationship between board size and firms performance irrespective of the performance
indicator used. There was positive relationship between board independence and firm
performance when accounting-based performance measures were used and there was no
significant relationship between the two, when the market based performance measures were
used. Moreover in this study, it was found that the impact of board independence on the firm
performance is maximum when the board independence is between 50-60%. In this study,
the author also took the board size and board independence as dependent variables and
different performance indicators as independent variables. Again, negative relationship was found
between the board independence and performance, and between board size and performance.

Disclosures and Firm Performance

Over the last one decade, more precisely after the Cadbury committee report 1992, there has
been a lot of discussion and debate on the transparency issue among the stakeholders of an
organization. In academic research too, scholars were examining how the transparency of a
system is related to good corporate governance practices. There is no denying the fact that
transparency is an important component of a well-functioning system of corporate governance.
However, corporate disclosure to stakeholders is the principal means by which companies can
become transparent (Solomon and Solomon 2004).
Previous researches have reported that investors get attracted by the relevant and reliable
disclosure of the companys performance (Diamond and Verrecchia, 1991 and Kim and
Verrecchia, 1994). Regulated disclosure provides new and relevant information for investors
which ultimately reflects the transparent system of the organization (Kothari, 2001 and
Bushman and Smith, 2003). According to Solomon and Solomon (2004), disclosure can be

12 The IUP Journal of Corporate Governance, Vol. VIII, No. 1, 2009

viewed from two perspectivescorporate disclosure and financial accounting disclosure. It is
observed that financial accounting information has been given more importance by the
Cadbury Committee Report (1992) but later on, it was realized that financial accounting
information represents only one aspect of corporate disclosure.
According to Healy and Palepu (2001), disclosure comprises all forms of voluntary corporate
communications, for example, management forecasts, analysts presentations, the annual
general meetings, press releases, information placed on corporate websites and other corporate
reports, such as stand-alone environmental or social reports. In addition, disclosure indicates
the quality of the firms product and business model, its growth strategy and market
positioning, as well as the risks it is facing (Chahine and Filatotchev, 2008).
It is mentioned in the Cadbury Committee Report (1992), that improved disclosure results
in improved transparency, which is one of the most essential elements of healthy corporate
governance practices. Moreover, there is a high chance that improved disclosure reduces the
agency cost, which is the bone of contention between the principal and the agent, since it is
found to be an important element of a good corporate governance practice (Jensen and
Meckling 1976). It is because of one reason that better information flows from the company
to the shareholders which results in less information asymmetry in the organization (Farrar and
Hannigan, 1998).
The importance of disclosure can be observed from agency theory. The contract between
principal and agent, requires the agent (management) to disclose relevant information which
enables the principal (shareholder) to monitor their compliance with the contractual agreement
(Healy and Palepu, 2001). Lang and Lundholm (1996) have examined the relations between the
disclosure practices of firms, the number of analysts following each firm and the properties of
the analysts earnings forecast. The findings of the study indicate that firms which disclose more
have a larger pool of potential investors. Their investors have more accurate beliefs about
future performance. It results in less asymmetry in investors beliefs about their performance.
However, it is imperative to mention that the disclosure of information depends on the intention
to raise external capital. Collet and Hrasky (2005) have revealed that the voluntary disclosure
of corporate information is positively associated with the intention to raise equity capital, but
not with the intention to raise debt capital.
It is found that the disclosure of information is a double-edged sword in the managements
hands. Disclosures about the firms human resources, risk, and the like, are likely to be effective
in reducing information asymmetries and mitigating their need for price protection.
On the other hand, disclosures about the marketing, R&D, and technology might jeopardize the
firms competitive advantage. Researchers have concluded that too much disclosure of propriety
information may lead investors to believe that extensive specific information may harm the firms
value (Chahine and Filatotchev, 2008). Moreover, companies are sometimes reluctant to disclose
the relevant information which could tarnish their image. For instance,
the pay of the employees at the lower level of the hierarchy and the ratio of this pay with the
employees of the higher level may not send a good signal to potential investors (Chandler, 1997).

Corporate Governance Mechanisms and Firm Performance: A Survey of Literature 13

 Disclosure of information enables the shareholder to evaluate the managements
performance by observing, how efficiently the management is utilizing the companys resources
in the interest of the principal (Healy and Palepu, 2001). Moreover, management remuneration
is determined by the financial accounting information. For instance, according to Bushman
et al. (1995), half of the managerial bonuses are found to be determined by corporate
performance reflected in the financial accounts. However, at the same time, there is ample
research which has documented that management have used accrual amounts to inflate the
income statement in order to get hefty bonuses and hike in their salaries (Klein, 2002).

There have been ample research findings which have documented the positive relationships
between disclosure and firms performance. Lang and Lundholm (1993) have reported that
analysts ratings of corporate disclosure are positively related to earnings performance.
Similarly, Botosan (1997) has examined the disclosure practices of firms in the machinery
industry in 1990. The study investigates the benefits that greater disclosure create for
companies. She has concluded that disclosure policies have a positive effect on cost of capital,
but not on market liquidity. Moreover, Healy et al. (1999) have investigated whether firms benefit
from expanded voluntary disclosure by examining changes in the capital market factors
associated with an increase in analysts disclosure ratings for 97 firms in US. They have shown
that, after controlling for earnings performance and other potential relevant variables such as
risk, growth and firms size, expanded disclosure is associated with an increase in stock
performance, growth in institutional ownership, increased stock liquidity and higher analyst
coverage.

Healy and Palepu (2001) have reported that firms have incentives to make voluntary
disclosure in order to reduce the information asymmetry. Therefore, it reduces the cost of
external financing through reduced information risk which ultimately leads to better firms
performance. In the same vein, after reviewing the literature on corporate disclosure, Bushman
and Smith (2003) have presented a conceptual framework, which relates financial accounting
information to firm level performance. They have conceptualized and reported that financial
accounting information can affect the investments, productivity and value-addition of firms.
In a cross country evaluation, Khanna et al. (2004) have found that there is a positive
relationship between capitalization and the overall transparency scores. They have concluded
that past performance can also affect the degree of disclosure. For instance, profitable firms
may be more willing to disclose information to outside investors than less profitable firms.
Hence, the findings of the study do not indicate the causal relationship between the disclosure
and firms level performance. It is not clear from the studies which causes what, is it disclosure
or firms level performance?

On the other hand, there are a few research studies which have highlighted the negative
relationship between the corporate disclosure and firms level performance. One of the studies,
conducted by Archambault and Archambault (2003) has documented an inconsistent
association between firms size, as measured by total assets, and total disclosure score.

14 The IUP Journal of Corporate Governance, Vol. VIII, No. 1, 2009

Managerial Ownership and Firm Performance
For more than 70 years, since Berle and Means (1932) classic work was recognized and which
gave the proposition that ownership and control in the modern corporation have been
separated, researchers have been trying to identify the optimal ownership structure and how
it influences a firms subsequent performance. Managerial ownership can be an effective
governance mechanism because it can align the interests of managers and shareholders.
Hence, it is likely that one will observe a positive effect applied by managerial shareholding on
the company (Jensen and Meckling, 1976). The same paper says that the positive effect is
because there is decline in the anticipated costs of the agency conflict between shareholders
and managers. Other researchers also agree with this idea. For example, Agrawal and Knoeber
(1996) illustrate ownership as an important corporate governance mechanism.
In another study by Chrisotomos (2005), it was observed that at small levels of shareholding
by managers, managerial ownership binds managers and outside shareholders to pursue a
common goal by decreasing managerial incentives for bonus consumption, utilization of
inadequate exertion and engagement in good projects (alignment effect). However, after some
level of ownership, managers put forth insufficient efforts, amass personal benefits and establish
themselves at the cost of others (entrenchment effect). Hence, it can be said that managerial
ownership is a governance mechanism used to control the actions of managers.
One of the internal control mechanisms is managerial ownership. This is achieved by
increasing the agents ownership in the firm, and by providing him with stocks of the firm.
Current work in this area shows that there occur two opposing effects of managerial
ownershipthe interest and the entrenchment effect (Jensen and Meckling, 1976). Under
interest effect, the correlation between managerial ownership and firms performance is positive
because the managers have to share the cost of their actions, whereas in entrenchment effect,
this association becomes negative as the manager has a large stake in the organization and thus
overlooks the interests of other shareholders. A question that arises now is how the increase
in ownership of the manager (agent) will have an impact on a firms performance. Will the
performance move forward or would it decline or remain as such? Numerous empirical studies
have been carried out to find a relationship between managerial ownership and firm
performance. However, they provide mixed results and are not uniform in their views.
The seminal work of Morck et al. (1987) studied the relationship between managerial
ownership and Tobins Q (proxy for market value). A non-monotonic relationship was observed
by the authors, which was explained as Tobins Q increase with ownership.
It suggests the convergence of benefits among agents and principals, whereas the decrease
suggests entrenchment effect in play. According to Mudambi and Nicosia (1998), ownership
concentration and the extent of investor control have entirely dissimilar effects on a firms
performance. Greater control by large shareholding groups has a positive effect on the firms
performance. On the other hand, more shareholding seems to be negatively linked with
performance. They also found an inconsistent relationship between managerial stock-holding
and firms performance, supporting the two theories of entrenchment and interest.

Corporate Governance Mechanisms and Firm Performance: A Survey of Literature 15

 Different types of ownerships that can have an effect on a firms performance, analyzed in
a study by Welbourne and Cyr (1999) define three types of ownershipthat by the CEO, the
top management and ownership by all the employees of the firm. Their study suggests that an
increase in ownership, by spreading it to all the employees, will have a superior impact on a
firms performance, whereas CEO and top management ownership will have a negative impact
on firms performance. Core and Larcker (2002) in their study on firm performance, found that
after compulsory increases in managerial share ownership, prior to the adoption of the plan,
the firms show lower performance as compared to other firms who do not follow any such plan.
They also established that share price return was highest in the first half of the year in which,
the announcement of the plan was made and that firm performance improves after managers
with less stock ownership are required to mandatorily increase their stake.
Accounting measure and correlation analysis was used (instead of stock returns) to evaluate
a relation between managerial ownership, risk and firm performance (Jahmani and Ansari,
2006). It was observed that there is no effect of ownership by the management on a firms
performance. The study also proposes that increase in managerial ownership may not offer any
motivation to managers to work more competently so as to make best use of the firms
resources in order to give maximum returns to the owners. Also, the risk that managers are
prepared to take does not increase after their stake in the firm increases. These results were
similar to the results obtained by earlier researchers claiming that ownership does not have any
effect on firms performance. In an empirical research, Demsetz and Lehn (1985) did not find
any considerable relationship between profit rates and ownership concentration.
Another study by Mueller and Oener (2006) focuses on small and medium-sized private firms
(in Germany) rather than listed companies (US and UK), and the effect of ownership on a firms
performance (testing the interest and entrenchment theories). A major difference that was
observed from other studies is that public companies with high value of managerial ownership
had negative influence on a firms performance because of retrenchment effect, which was not
observed in case of private firms. The authors found a positive relationship between ownership
(40%) and performance.
Most of the researches done in this area had been done on firms in developed countries.
Zeitun and Gang (2007) studied the effect of ownership on a firms performance in a developing
economy (Jordan). It was found empirically that there was a positive impact of managerial
ownership and a firms performance. Another study by McConnell and Servaes (1990) studied
the relationship between Tobins Q and ownership where a considerable positive relationship
was observed. In a different study, Ng (2005) examined the relationship among family ownership
and firms performance (in Hong Kong). It was observed that family ownership supports the
theory of interest proposed by Jensen and Meckling (1976) and that family ownership affects
a firms performance not vice-versa. In another study, (Ming-Yuan Chen, 2006) the relation
between managerial ownership and firm performance was studied taking firms from Taiwan as
the sample. The results show that the association of family in the management of the firm and
related dealings determines the option of ownership regimes. It was also found that
entrenchment effect engulfs incentive effect at a higher level of ownership.

16 The IUP Journal of Corporate Governance, Vol. VIII, No. 1, 2009

 In most of the researches, the impact of institutional ownership on firm performance is not
studied as it is assumed that there is not much interaction (Chaganti and Damanpour, 1991).
Capital structure and ROE was found to be considerably related to the amount of shareholdings
by institutional investors. They also impact firms ROA, ROE and Price-Earnings (P-E) ratios (with
varying degrees of strength). It was also observed that ownership structure had no considerable
impact on total stock return.
Chhibber and Majumdar (1998) in their work, studied the influence of government
ownership on the performance of the firm. The study found that three types of state ownership
exist in India. Firstly, firms where the government has less than 26% shareholding; secondly,
where the government owns more than 26% shares; and thirdly, where state is the majority
holder with more than 50% shares. The study revealed that firms which do not have state as
the majority shareholder performed better than firms where the state is a majority shareholder.
A similar study by Ahuja and Majumdar (1998) where the authors study the performance of 68
state-owned firms, disclose that these firms were on an average less competent in employing
their resources. This indicated the low performance of state-owned firms.
Kumar (2003) in his study, examines the impact of ownership on the performance of a firm
by studying Indian firms. The author studied more than 2000 publicly traded enterprises to
establish a relationship. The findings of the research suggests that foreign shareholding does
not influence the performance of the firm significantly. This provides contrasting results to the
other studies. It was also found that ownership by financial institutions positively influences a
firms performance. The study also found that the directors ownership had an influence on the
performance, but no significant difference was established in managerial ownership and firms
performance across group and stand-alone firms. Ownership in India is extremely concentrated
in the hands of family members and their relatives (Pant and Pattanayak, 2007). The authors
observed the performance of Indian firms in lieu of insider ownership. The findings disclose
that as insider ownership increased (0-20%), firm value also increased. As the stake increased
from 20%, the entrenchment effect came into play and the performance decreased, but as the
ownership extended beyond 49%, there was a convergence of interest with the firm and once
again the performance of the firm improved.

Conclusion
From the above discussion, it can be concluded that there is no concrete answer to the
relationship between the corporate governance mechanisms and a firms performance.
Literature on corporate disclosures provides plenty of support to assume that there is a link
between corporate governance disclosure and firms level performance. However, the literature
on relationship between the board characteristics and firms performance does not provide any
conclusive result. Similarly, for ownership based on the above survey of literature, one can
conclude that the exact relationship between firms performance and managerial ownership is
still ambiguous. The relationship is either positive or non-existent. This calls for more research
in this area.

Corporate Governance Mechanisms and Firm Performance: A Survey of Literature 17

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