Corporate Governance Rating and Firm Performance: Empirical Evidence from Canadian Companies

Abstract

The purpose of this empirical study is to establish the relationship between the The Globe and Mail rating corporate governance quality and firm performance measured by return on assets (ROA) and Tobin's Q ratio. To achieve this goal it was necessary to formulate the hypothesis based on the existing literature. Various methodologies for assessing the quality of corporate governance and construction of corporate governance indices were discussed and their association with firm performance was examined. Secondly, it was necessary to gather data for testing hypotheses. The third step was to conduct actual empirical study on the basis of collected data and to interpret its results. Consequently, it was established that the relationship between corporate governance quality and firm performance depends on whether a company is cross-listed on U.S. stock exchanges. Thus, corporate governance is statistically significantly associated with Tobin’s Q and ROA only for non-cross-listed companies. Out of the four sub-categories of corporate governance evaluated in the rating, only two – board composition and shareholder rights protection – have statistically significant positive association with Tobin’s Q. In the end, limitations of the study as well as possibilities of managerial application of its results are discussed.