Board Transparency, CEO Monitoring and Firms' Financial Performance

Abstract

This international empirical study analyses the relation between board transparency, CEO monitoring policy and financial performance. A unique dataset of, on average, 1211 companies from 25 different countries, as provided by international SiRi analysts over the years 2003-2007, enables us to quantify relations between reported corporate governance attributes and financial performance. This paper applies the Fama and French (1993) and Carhart (1997) methodology to estimate the influence of ‘good governance’ on financial performance. Quintile top and bottom portfolios are selected and compared financially. Controlling for size, risk, book-to-market value and a momentum factor, it is concluded that the top transparent companies show significant better financial performance statistically (7.8% per year) than compared with less transparent companies. A second conclusion shows there is evidence that a more intense CEO monitoring policy by a company’s board does lead to a statistically higher financial performance in countries with the German legal origin but a negative return in those with the French legal origin. Despite the increasing influence of stewardship theory, these results indicate that the opposing agency theory still dominates the international capital markets.