corporate governance research paper

• Open access
• Published: 01 November 2021

The impact of corporate governance measures on firm performance: the influences of managerial overconfidence

• Tolossa Fufa Guluma   ORCID: orcid.org/0000-0002-1608-5622 1  

Future Business Journal volume  7 , Article number:  50 ( 2021 ) Cite this article

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The paper aims to investigate the impact of corporate governance (CG) measures on firm performance and the role of managerial behavior on the relationship of corporate governance mechanisms and firm performance using a Chinese listed firm. This study used CG mechanisms measures internal and external corporate governance, which is represented by independent board, dual board leadership, ownership concentration as measure of internal CG and debt financing and product market competition as an external CG measures. Managerial overconfidence was measured by the corporate earnings forecasts. Firm performance is measured by ROA and TQ. To address the study objective, the researcher used panel data of 11,634 samples of Chinese listed firms from 2010 to 2018. To analyze the proposed hypotheses, the study employed system Generalized Method of Moments estimation model. The study findings showed that ownership concentration and product market competition have a positive significant relationship with firm performance measured by ROA and TQ. Dual leadership has negative relationship with TQ, and debt financing also has a negative significant association’s with both measures of firm performance ROA and TQ. Moreover, the empirical results also showed managerial overconfidence negatively influences the relationship of board independence, dual leadership, and ownership concentration with firm performance. However, managerial overconfidence positively moderates the impact of debt financing on firm performance measured by Tobin’s Q and negative influence on debt financing and operational firm performance relationship. These findings have several contributions: first, the study extends the literature on the relationship between CG and a firm’s performance by using the Chinese CG structure. Second, this study provides evidence that how managerial behavioral bias interacts with CG mechanisms to affect firm performance, which has not been studied in previous literature. Therefore, the results of this study contribute to the theoretical perspective by providing an insight into the influencing role of managerial behavior in the relationship between CG practices and firm performance in an emerging markets economy. Hence, the empirical result of the study provides important managerial implications for the practice and is important for policy-makers seeking to improve corporate governance in the emerging market economy.

Introduction

Corporate governance and its relation with firm performance, keep on to be an essential area of empirical and theoretical study in corporate study. Corporate governance has got attention and developed as an important mechanism over the last decades. The fast growth of privatizations, the recent global financial crises, and financial institutions development have reinforced the improvement of corporate governance practices. Well-managed corporate governance mechanisms play an important role in improving corporate performance. Good corporate governance is fundamental for a firm in different ways; it improves company image, increases shareholders’ confidence, and reduces the risk of fraudulent activities [ 67 ]. It is put together on a number of consistent mechanisms; internal control systems and external environments that contribute to the business corporations’ increase successfully as a complete to bring about good corporate governance. The basic rationale of corporate governance is to increase the performance of firms by structuring and sustaining initiatives that motivate corporate insiders to maximize firm’s operational and market efficiency, and long-term firm growth through limiting insiders’ power that can abuse over corporate resources.

Several studies are contributed to the effect of CG on firm performance using different market developments. However, there is no consensus on the role CG on firm performance, due to different contextual factors. The role of CG mechanisms is affected by different factors. Prior studies provided different empirical evidence such as [ 14 ], suggested that the monitoring efficiency of the board of directors is affected by internal and external factors like government regulation and internal firm-specific factors; the role of board monitoring is determined by ownership structure and firm-specific characters Boone et al. [ 8 ], and Liu et al. [ 57 ] and Bozec [ 10 ] also reported that external market discipline affects the internal CG role on firm performance. Moreover, several studies studied the moderation role of different variables in between CG and firm value. Mcdonald et al. [ 63 ] studied CEO experience moderating the board monitoring effectiveness, and [ 60 ] studied the moderating role of product market competition in between internal CG and firm performance. Bozec [ 10 ] studied market disciple as a moderator between the board of directors and firm performance. As to the knowledge of the researcher, no study considered the influencing role of managerial overconfidence in between CG mechanisms and firm corporate performance. Thus, this study aims to investigate the influence of managerial overconfidence in the relationship between CG mechanisms and firm performance by using Chinese listed firms.

Managers (CEOs) were able to valuable contributions to the monitoring of strategic decision making [ 13 ]. Behavioral decision theory [ 94 ] suggests that overconfidence, as one type of cognitive bias, encourages decision-makers to overestimate their information and problem-solving capabilities and underestimates the uncertainties facing their firms and the potential losses from litigation associated with claims against them. Several prior studies reported different results of the manager's role in corporate governance in different ways. Previous studies claimed that overconfidence is a dysfunctional behavior of managers that deals with unfavorable consequences for the firm outcome, such as value distraction through unprofitable mergers and suboptimal investment behavior [ 61 ], and unlawful activities (Mishina et al. [ 64 ]). Oliver [ 68 ] argued the human character of individual managers affects the effectiveness of corporate governance. Top managers' behaviors and experience are primary determinants of directors' ability to effectively evaluate their managerial decision-making [ 45 ]. In another way, [ 47 , 58 ] noted managerial overconfidence can encourage some risk and make up for managerial risk aversion, which leads to suboptimal investment decisions. Jensen [ 41 ] suggested in the presence of free cash flow, the manager may overinvest and they can accept a negative net present value project. Therefore, the existence of CG mechanisms aims to eliminate or reduce the effect of agency and asymmetric information on the CEO’s decisions [ 62 ]. This means that the objectives of CG mechanisms are to counterbalance the effect of such problems in the corporate organization that may affect the value of the firms in the long run. Even with the absence of agency conflicts and asymmetric information problems, there is evidence documented for distortions such as the case of corporate investment. Managers will over- or under-invest regarding their optimism level and the availability of internal cash flow.

Agency theory by Jensen and Meckling [ 42 ] has a very clear vision of the problems that exist in the company to know the disagreement of interests between shareholders and managers. Irrational behavior of management resulting from behavioral biases of executive managers is a great challenge in corporate governance [ 44 ]. Overconfidence may create more agency conflict than normal managers. It may lead internal and external CG mechanisms to decisions which damage firm value. The role of CG mechanisms mitigating corporate governance results from agency costs, information asymmetry, and their impact on corporate decisions. This means the behavior of overconfident executives may affect controlling and monitoring role of internal/external CG mechanisms. According to Baccar et al. [ 5 ], suggestion is that one of the roles of corporate governance is controlling such managerial behavioral bias and limiting their potential effects on the company’s strategies. These discussions lead to the conclusion that CEO overconfidence will negatively or positively influence the relationships of CG on firm performance. The majority of studies in the corporate governance field deal with internal problems associated with managerial opportunism, misalignment of objectives of managers and stakeholders. To deal with these problems, the firm may organize internal governance mechanisms, and in this section, the study provides a review of research focused on this specific aspect of corporate governance.

Internal CG includes the controlling mechanism between various actors inside the firm: that is, the company management, its board, and shareholders. The shareholders delegate the controlling function to internal mechanisms such as the board or supervisory board. Effective internal CG is essential in accomplishing company strategic goals. Gillan [ 30 ] described internal mechanisms by dividing them into boards, managers, shareholders, debt holders, employees, suppliers, and customers. These internal mechanisms of CG work to check and balance the power of managers, shareholders, directors, and stakeholders. Accordingly, independent board, CEO duality, and ownership concentration are the main internal corporate governance controlling mechanisms suggested by various researchers in the literature. Thus, the study considered these three internal corporate structures in this study as internal control mechanisms that affect firm performance. Concurrently, external CG mechanisms are mechanisms that are not from the inside of the firm, which is from the outside of the firms and includes: market competition, take over provision, external audit, regulations, and debt finance. There are a lot of studies that examine and investigate the effect of external CG practices on the financial performance of a company, especially in developed nations. In this study, product market competition and debt financing have been taken as representatives of external CG mechanisms. Thus, the study used internal CG measures; independent board, dual leadership, ownership concentration, and product-market competition, and debt financing as a proxy of external CG measures.

Literature review and hypothesis building

Corporate governance and firm performance.

Corporate governance has got attention and developed as a significant mechanism more than in the last decades. The recent financial crises, the fast growth of privatizations, and financial institutions have reinforced the improvement of corporate governance practices in numerous institutions of different countries. As many studies revealed, well-managed corporate governance mechanisms play an important role in providing corporate performance. Good corporate governance is fundamental for a firm in several ways: OECD [ 67 ] indicates the good corporate governance increases the company image, reduces the risks, and boosts shareholders' confidence. Furthermore, good corporate governance develops a number of consistent mechanisms, internal control systems and external environments that contribute to the business corporations’ increase effectively as a whole to bring about good corporate governance.

The basic rationale of corporate governance is to increase the performance of companies by structuring and sustaining incentives that initiate corporate managers to maximize firm’s operational efficiency, return on assets, and long-term firm growth through limiting managers’ abuse of power over corporate resources.

Corporate governance mechanisms are divided into two broad categories: internal corporate governance and external corporate governance mechanisms. Supporting this concept, Keasey and Wright [ 43 ] indicated corporate governance as a framework for effective monitoring, regulation, and control of firms which permits alternative internal and external mechanisms for achieving the proposed company’s objectives. The achievement of corporate governance relies on the mechanism effectiveness of both internal and external governance structures. Gillan [ 30 ] suggested that corporate governance can be divided into two: the internal and external mechanisms. Gillan [ 30 ] described internal mechanisms by dividing into boards, managers, shareholders, debt holders, employees, suppliers, and customers, and also explain external corporate governance mechanisms by incorporating the community in which companies operate, the social and political environment, laws and regulations that corporations and governments involved in.

The internal mechanisms are derived from ownership structure, board structure, and audit committee, and the external mechanisms are derived from the capital market corporate control market, labor market, state status, and investors activate [ 26 ]. The balance and effectiveness of the internal and external corporate governance practices can enhance a better corporate operational performance [ 21 ]. Literature argued that integrated and complete governance mechanisms are better with multi-dimensional theoretical view [ 87 ]. Thus, the study includes both internal and external CG mechanisms to broadly show the connection of these components. Filatotchev and Nakajima [ 26 ] suggest that an integrated approach bringing external and internal mechanisms jointly enhances to build up a more general view on the effectiveness and efficiency of different corporate governance mechanisms. Thus, the study includes both internal and external CG mechanisms to broadly show the connection of these three components.

Board of directors and ownership concentration are the main internal corporate governance mechanisms and product market competition and debt finance also the main representative of external corporate governance suggested by many researchers in the literature that were used in this study. Therefore, the following sections provide a brief discussion of internal and external corporate governance from different angles.

Independent board and firm performance

Board of directors monitoring has been centrally important in corporate governance. Jensen [ 41 ] board of directors is described as the peak of the internal control system. The board represents a firm’s owners and is responsible for ensuring that the firm is managed effectively. Thus, the board is responsible for adopting control mechanisms to ensure that management’s behavior and actions are consistent with the interest of the owners. Mainly the responsibility of the board of directors is selection, evaluation, and removal of poorly performing CEO and top management, the determination of managerial incentives and monitoring, and assessment of firm performance [ 93 ]. The board of directors has the formal authority to endorse management initiatives, evaluate managerial performance, and allocate rewards and penalties to management on the basis of criteria that reflect shareholders’ interests.

According to the agency theory board of directors, the divergence of interests between shareholders and managers is addressed by adopting a controlling role over managers. The board of directors is one of the key governance mechanisms; the board plays a pivotal role in monitoring managers to reduce the problems associated with the separation of ownership and management in corporations [ 24 ]. According to Chen et al. [ 16 ], the strategic role of the board became increasingly important and going beyond the mere approval of strategic management decisions. The board of directors must serve to reconcile management decisions with the objectives of shareholders and stakeholders, which can at times influence strategic decisions (Uribe-Bohorquez [ 85 ]). Therefore, the board's responsibilities extend beyond controlling and monitoring management, ensuring that it takes decisions that are reliable with the corporations [ 29 ]. In the perspective of resource dependence theory, an independent director is often linked firm to outside environments, who are non-management members of the board. Independent boards of directors are more believed to be effective in protecting shareholders' interests resulting in high performance [ 26 ]. This focus on board independence is grounded in agency theory, which addresses inefficiencies that arise from the separation of ownership and control [ 24 ]. As agency theory perspective boards of directors, particularly independent boards are put in place to monitor managers on behalf of shareholders [ 59 ].

A large number of empirical studies are undertaken to verify whether independent directors perform their governance functions effectively or not, but their results are still inconclusive. Studies [ 2 , 50 , 52 , 56 , 85 ], reported the supportive arguments that independent board of directors and firm performance have a positive relationship; in other ways, a large number of studies [ 6 , 17 , 65 91 ], and findings indicated the independent director has a negative relation with firm performance. The positive relationship of independent board and firm performance argued that firms which empower outside directors may lead to their more effective monitoring and therefore higher firm performance. The negative relationship of independent board and firm performance results are based on the argument that external directors have no access to information about the internal business of the firms and their relation with internal management does not allow them to have a sufficient understanding of the firm’s day-to-day business activities or it may arise from the lack of knowledge of the business or the ability to monitor management actions [ 28 ].

Specifically in China, the corporate governance regulation code was approved in 2001 and required that the board of all Chinese listed domestic companies must include at least one-third of independent directors on their board by June 2003. Following this direction, many listed firms had appointed more independent directors, with a view to increase the independence of the board [ 54 ]. This proclamation is staying stable till now, and the number of independent directors in Chinese listed firms is increasing from time to time due to its importance. Thus, the following hypothesis is proposed.

Hypothesis 1

The proportion of independent directors in board members is positively related to firm performance.

Dual leadership and firm performance

CEO duality is one of the important board control mechanisms of internal CG mechanisms. It refers to a situation where the firm’s chief executive officer serves as chairman of the board of directors, which means a person who holds both the positions of CEO and the chair. Regarding leadership and firm performance relation, there are different arguments; there is not consistent conclusion among different researchers. There are two competitive views about dual leadership in corporate governance literature. Agency theory view proposed that duality could minimize the board’s effectiveness of its monitoring function, which leads to further agency problems and enhance poor performance [ 41 , 83 ]. As a result, dual leadership enhances CEO entrenchment and reduces board independence. In this condition, these two roles in one person made a concentration of power and responsibility, and this may result in busyness of CEO which affects the normal duties of a company. This means the CEO is responsible to execute a company’s strategies, monitoring and evaluating the managerial activities of a company. Thus, separating these two roles is better to avoid concentration of authority and power in one individual and separate leadership of board from the ruling of the business [ 72 ].

On the other hand, stewardship theory suggests that managers are good stewards of company resources, which could benefit a firm [ 9 ]. This theory advocates that there is no conflict of interest between shareholders and managers, if the role of CEO and chairman vests on one person, rather CEO duality would promote a clear sense of strategic direction by unifying and strengthening leadership.

In the Chinese firm context, there are different conflicting conclusions about the relationship between CEO duality and firm performance.

Hypothesis 2

CEO duality is negatively associated with firm performance.

Ownership concentration and firm performance

The ownership structure is which has a profound effect on business strategy and performance. Agency theory [ 81 ] argued that concentrated ownership can monitor corporate operating management effectively, alleviate information problems and agency costs, consequently, improve firm performance. The concentration of ownership as a large number of studies grounded in agency theory suggests that it has both the incentive and influence to assure that managers and directors operate in the interests of shareholders [ 19 ]. Concentrated ownership presence among the firm’s investors provides an important driver of good CG that should lead to efficiency gains and improvement in performance [ 81 ].

Due to shareholder concentrated economic risk, these shareholders have a strong encouragement to watch strictly over management, making sure that management does not engage in activities that are damaging the wealth of shareholders. Similarly, Shleifer and Vishny [ 80 ] argue that large share blocks reduce managerial opportunism, resulting in lower agency conflicts between management and shareholders.

In other ways, some researchers have indicated, block shareholders harmfully on the value of the firm, especially when majority shareholders can abuse their position of dominant control at the expense of minority shareholders [ 25 ]. As a result, at some level of ownership concentration the distinction between insiders and outsiders becomes unclear, and block-holders, no matter what their identity is, may have strong incentives to switch resources to the ways that make them better off at the cost of other shareholders. However, concentrated shareholding may create a new set of agency conflicts that may provide a negative impact on firm performance.

In the emerging market context, studies [ 77 , 90 ] find a positive association between ownership concentration and accounting profit for Chinese public companies. As Yu and Wen [ 92 ] argued, Chinese companies have a concentrated ownership structure, limited disclosure, poor investor protection, and reliance on the banking system. As this study argues, this concentration is more controlled by the state, institution, and private shareholders. Thus, ownership concentration in Chinese firms may be an alternative governance tool to reduce agency problems and enhance efficiency.

Hypothesis 3

The ownership concentration is positively related to firm performance.

Product market competition and firm performance

Theoretical models have argued that competition in product markets is a powerful force for overcoming the agency problem between shareholders and managers [ 78 ]. Competition in product markets plays the role of a takeover [ 3 ], and well-managed firms take over the market from poorly managed firms. According to this study finding, competition helps to build the best management team. Competition acts as a substitute for internal governance mechanisms, practically the market for corporate control [ 3 ]. Chou et al. [ 18 ] provided evidence that product market competition has a substantial impact on corporate governance and that it substitutes for corporate governance quality, and they provide evidence that the disciplinary force of competition on the management of the firm is from the fear of insolvency. For instance, Ibrahim [ 39 ] reported firms to operate in competitive industries record more returns of share compared with the concentrated industries. Hart [ 33 ] stated that competition inspires managers to work harder and, thus, reduces managerial slack. This study suggests that in high competition, the selling prices of products or services are more likely to fall because managers are concerned with their economic interest, which may tie up with firm performance. Managers are more focused on enhancing productivity that is more likely to reduce cost and increase firm performance. Thus, competition in product market can reduce agency problems between owners and managers and can enhance performance.

Hypothesis 4

Product market competition is positively associated with firm performance.

Debt financing and firm performance

Debt financing is one of the important governance mechanisms in aligning the incentives of corporate managers with those of shareholders. According to agency theory, debt financing can increase the level of monitoring over self-serving managers and that can be used as an alternative corporate governance mechanism [ 40 ]. This theory argues two ways through debt finance can minimize the agency cost: first the potential positive impact of debt comes from the discipline imposed by the obligation to continually earn sufficient cash to meet the principal and interest payment. It is a commitment device for executives. Second leverage reduces free cash flows available for managers’ discretionary expenses. Literature suggests that when leverage increases, managers may invest in high-risk projects in order to meet interest payments; this action leads lenders to monitor more closely the manager’s action and decision to reduce the agency cost. Koke and Renneboog [ 48 ] have found empirical support that a positive impact of bank debt on productivity growth in German firms. Also, studies like [ 77 , 86 ] examine empirically the effect of debt on firm investment decisions and firm value; reveal that debt finance is a negative effect on corporate investment and firm values [ 69 ] find that there is a significant and negative relationship between debt intensity and firm productivity in the case of Indian firms.

In the Chinese financial sectors, banks play a great role and use more commercial judgment and consideration in their leading decision, and even they monitor corporate activities [ 82 ]. In China listed company [ 77 , 82 ] found that an increase in bank loans increases the size of managerial perks and free cash flows and decreases corporate efficiency, especially in state control firms. The main source of debts is state-owned banks for Chinese listed companies [ 82 ]. This shows debt financing can act as a governance mechanism in limiting managers’ misuse of resources, thus reducing agency costs and enhance firm values. However, in China still government plays a great role in public listed company management, and most banks in China are also governed by the central government. However, the government is both a creditor and a debtor, especially in state-controlled firms. Meanwhile, the government as the owner has multiple objectives such as social welfare and some national (political) issues. Therefore, when such an issue is considerable, debt financing may not properly play its governance role in Chinese listed firms.

Hypothesis 5

Debt financing has a negative association with firm performance

Influence of managerial overconfidence on the relationship of corporate governance and firm performance

Corporate governance mechanisms are assumed to be an appropriate solution to solve agency problems that may derive from the potential conflict of interest between managers and officers, on the one hand, and shareholders, on the other hand [ 42 ].

Overconfidence is an overestimation of one’s own abilities and outcomes related to one’s own personal situation [ 74 ]. This study proposed from the behavioral finance view that overconfidence is typical irrational behavior and that a corporate manager tends to show it when they make business decisions. Overconfident CEOs tend to think they have more accurate knowledge about future events than they have and that they are more likely to experience favorable future outcomes than they are [ 35 ]. Behavioral finance theory incorporates managerial psychological biases and emotions into their decision-making process. This approach assumes that managers are not fully rational. Concurrently, several reasons in the literature show managerial irrationality. This means that the observed distortions in CG decisions are not only the result of traditional factors. Even with the absence of agency conflicts and asymmetric information problems, there is evidence documented for distortions such as the case of corporate investment. Managers will over- or under-invest regarding their optimism level and the availability of internal cash flow. Such a result push managers to make sub-optimal decisions and increase observed corporate distortions as a result. The view of behavioral decision theory [ 94 ] suggests that overconfidence, as one type of cognitive bias, encourages decision-makers to overestimate their own information and problem-solving capabilities and underestimates the uncertainties facing their firms and the potential losses from proceedings related with maintains against them.

Researchers [ 34 ,  61 ] discussed the managerial behavioral bias has a great impact on firm corporate governance practices. These studies carefully analyzed and clarified that managerial overconfidence is a major source of corporate distortions and suggested good CG practices can mitigate such problems.

In line with the above argument and empirical evidence of several researchers, therefore, the current study tried to investigate how the managerial behavioral bias (overconfidence) positively or negatively influences the effect of CG on firm performance using Chinese listed firms.

The boards of directors as central internal CG mechanisms have the responsibility to monitor, control, and supervise the managerial activities of firms. Thus, the board of directors has the responsibility to monitor and initiate managers in the company to increase the wealth of ownership and firm value. The capability of the board composition and diversity may be important to control and monitor the internal managers' based on the nature of internal executives behaviors, managerial behavior bias that may hinder or smooth the progress of corporate decisions of the board of directors. Accordingly, several studies suggested different arguments; Delton et al. [ 20 ] argued managerial behavior is influencing the allocation of board attention to monitoring. According to this argument, board of directors or concentrated ownership is not activated all the time continuously, and board members do not keep up a constant level of attention to supervise CEOs. They execute their activities according to firm and CEO status. While the current performance of the firm desirable the success confers celebrity status on CEOs and board will be liable to trust the CEOs and became idle. In other ways, overconfidence managers are irrational behaviors that tend to consider themselves better than others on different attributes. They do not always form beliefs logically [ 73 ]. They blame the external advice and supervision, due to overestimating their skills and abilities, underestimate their risks [ 61 ]. Similarly, CEOs are the most decision-makers in the firm strategies. While managers are highly overconfident, board members (especially external) face information limitations on a day-to-day activities of internal managers. In other way, CEOs have a strong aspiration to increase the performance of their firm; however, if they achieve their goals, they may build their empire. This situation will pronounce where the market for corporate control is not matured enough like China [ 27 ]. So, this fact affects the effectiveness of board activities in strategic decision-making. In contrast, as the study [ 7 ] indicated, as the number of the internal board increases, the impact of managerial overconfidence in the firm became increasing and positively correlated with the leadership duality. In other ways, agency theory, many opponents suggest that CEO duality reduces the monitoring role of the board of directors over the executive manager, and this, in turn, may harm corporate performance. In line with this Khajavi and Dehghani, [ 44 ] found that as the number of internal board increases, the managerial overconfidence bias will increase in Tehran Stock Exchange during 2006–2012.

This shows us the controlling and supervising role of independent directors are less likely in the firms managed by overconfident managers than normal managers; conversely, the power of CEO duality is more salient in the case of overconfident managers than normal managers.

Hypothesis 2a

Managerial overconfidence negatively influences the relationship of independent board and firm performance.

Hypothesis 2b

Managerial overconfidence strengthens the negative relationships of CEO duality and firm performance.

An internal control mechanism ownership concentration believes in the existence of strong control against the managers’ decisions and choices. Ownership concentration can reduce managerial behaviors such as overconfidence and optimism since it contributes to the installation of a powerful control system [ 7 ]. They documented that managerial behavior affects the monitoring activities of ownership concentration on firm performance. Ownership can affect the managerial behavioral bias in different ways, for instance, when CEOs of the firm become overconfident for a certain time, the block ownership controlling attention is weakened [ 20 ], and owners trust the internal managers that may damage the performance of the firms in an emerging market where external market control is weak. Overconfidence CEOs have the quality that expresses their behavior up on their company [ 36 ]. In line with this fact, the researcher can predict that the impact of concentrated ownership on firm performance is affected by overconfident managers.

Hypothesis 2c

Managerial overconfidence negatively influences the impact of ownership concentration on firm performance.

Theoretical literature has argued that product market competition forces management to improve firm performance and to make the best decisions for the future. In high competition, managers try their best due to fear of takeover [ 3 ], well-managed firms take over the market from poorly managed firms, and thus, competition helps to build the best management team. In the case of firms operating in the competitive industry, overconfidence CEO has advantages, due to its too simple to motivate overconfident managerial behaviors due to being overconfident managers assume his/her selves better than others. Overconfident CEOs are better at investing for future investments like research and development, so it plays a strategic role in the competition. Englmaier [ 23 ] argues firms in a more competitive industry better hire a manager who strongly believes in better future market outcomes.

Therefore, the following hypothesis was proposed:

Hypothesis 2d

Managerial overconfidence moderates the effect of product market competition on firm performance.

Regarding debt financing, existing empirical evidence shows no specific pattern in the relation of managerial overconfidence and debt finance. Huang et al. [ 38 ] noted that overconfident managers normally overestimate the profitability of investment projects and underestimate the related risks. So, this study believes that firms with overconfident managers will have lower debt. Then, creditors refuse to provide debt finance when firms are facing high liquidity risks. Abdullah [ 1 ] also argues that debt financers may refuse to provide debt when a firm is having a low credit rating. Low credit rating occurs when bankers believe firms are overestimating the investment projects. Therefore, creditors may refuse to provide debt when managers are overconfident, due to under-estimating the related risk which provides a low credit rating.

However, in China, the main source of debt financers for companies is state banks [ 82 ], and most overconfidence CEOs in Chinese firms have political connections [ 96 ] with the state and have a better relationship with external financial institutions and public banks. Hence, overconfident managers have better in accessing debt rather than rational managers in the context of China that leads creditors to allow to follow and influence the firm investments through collecting information about the firm and supervise the firms directly or indirectly. Thus, managerial overconfidence could have a positive influence on relationships between debt finance and firm performance; thus, the following hypothesis is proposed:

Hypothesis 2e

Managerial overconfidence moderates the relationship between debt financing and firm performance.

To explore the impact of CG on firm performance and whether managerial behavior (managerial overconfidence) influences the relationships of CG and firm performance, the following research model framework was developed based on theoretical suggestions and empirical evidence.

Data sources and sample selection

The data for this study required are accessible from different sources of secondary data, namely China Stock Market and Accounting Research (CSMAR) database and firm annual reports. The original data are obtained from the CSMAR, and the data are collected manually to supplement the missing value. CSMAR database is designed and developed by the China Accounting and Financial Research Center (CAFC) of Honk Kong Polytechnic University and by Shenzhen GTA Information Technology Limited company. All listed companies (Shanghai and Shenzhen stock Exchange) financial statements are included in this database from 1990 and 1991, respectively. All financial data, firm profile data, ownership structure, board structure, composition data of listed companies are included in the CSMAR database. The research employed nine consecutive years from 2010 to 2018 that met the condition that financial statements are available from the CSMAR database. This study sample was limited to only listed firms on the stock market, due to hard to access reliable financial and corporate governance data of unlisted firms. All data collected from Chinese listed firms only issued on A shares in domestic stoke market exchange of Shanghai and Shenzhen. The researcher also used only non-financial listed firms’ because financial firms have special regulations. The study sample data were unbalanced panel data for nine consecutive years from 2010 to 2018. To match firms with industries, we require firms with non-missing CSRC top-level industry codes in the CSMAR database. After applying all the above criteria, the study's final observations are 11,634 firm-year observations.

Measurement of variables

Dependent variable.

• Firm performance

To measure firm performance, prior studies have been used different proxies, by classifying them into two groups: accounting-based and market-based performance measures. Accordingly, this study measures firm performance in terms of accounting base (return on asset) and market-based measures (Tobin’s Q). The ROA is measured as the ratio of net income or operating benefit before depreciation and provisions to total assets, while Tobin’s Q is measured as the sum of the market value of equity and book value of debt, divided by book value of assets.

Independent Variables

Board independent (bind).

Independent is calculated as the ratio of the number of independent directors divided by the total number of directors on boards. In the case of the Chinese Security Regulatory Commission (2002), independent directors are defined as the “directors who hold no position in the company other than the position of director, and no maintain relation with the listed company and its major shareholders that might prevent them from making objective judgment independently.” In line with this definition, many previous studies used a proportion of independent directors to measure board independence [ 56 , 79 ].

CEO Duality

CEO duality refers to a position where the same person serves the role of chief executive officer of the form and as the chairperson of the board. CEO duality is a dummy variable, which equals 1 if the CEO is also the chairman of the board of directors, and 0 otherwise.

Ownership concentration (OWCON)

The most common way to measure ownership concentration is in terms of the percentage of shareholdings held by shareholders. The percentage of shares is usually calculated as each shareholder’s shareholdings held in the total outstanding shares of a company either by volume or by value in a stock exchange. Thus, the distribution of control power can be measured by calculating the ownership concentration indices, which are used to measure the degree of control or the power of influence in corporations [ 88 ]. These indices are calculated based on the percentages of a number of top shareholders’ shareholdings in a company, usually the top ten or twenty shareholders. Following the previous studies [ 22 ], Wei Hu et al. [ 37 ], ownership concentration is measured through the total percentage of the 10 top block holders' ownership.

Product market competition (PMC)

Previous studies measure it through different methods, such as market concentration, product substitutability and market size. Following the previous work in developed and emerging markets [product substitutability [ 31 , 57 ], the current study measured using proxies of market concentration (Herfindahl–Hirschman Index (HHI)). The market share of every firm is calculated by dividing the firm's net sale by the total net sale of the industry, which is calculated for each industry separately every year. This index measures the degree of concentration by industry. The bigger this index is, the more the concentration and the less the competition in that industry will be, vice versa.

Debt Financing (DF)

The debt financing proxy in this study is measured by the percentage of a total asset over the total debt of the firm following the past studies [ 69 , 95 ].

Interaction variable

Managerial overconfidence (moc).

To measure MOC, several researchers attempt to use different proxies, for instance CEO’s shareholdings [ 61 ] and [ 46 ]; mass media comments [ 11 ], corporate earnings forecast [ 36 ], executive compensation [ 38 ], and managers individual characteristics index [ 53 ]. Among these, the researcher decided to follow a study conducted in emerging markets [ 55 ] and used corporate earnings forecasts as a better indicator of managerial overconfidence. If a company’s actual earnings are lower than the earnings expected by managers, the managers are defined as overconfident with a dummy variable of (1), and as not overconfident (0) otherwise.

Control variables

The study contains three control variables: firm size, firm age, and firm growth opportunities. Firm size is an important component while dealing with firm performance because larger firms have more agency issues and need strong CG. Many studies confirmed that a large firm has a large board of directors, which increases the monitoring costs and affects a firm’s value (Choi et al., 2007). In other ways, large firms are easier to generate funds internally and to gain access to funds from an external source. Therefore, firm size affects the performance of firms. Firm size can be measured in many ways; common measures are market capitalization, revenue volume, number of employments, and size of total assets. In this study, firm size is measured by the logarithm of total assets following a previous study. Firm age is the number of years that a firm has operated; it was calculated from the time that the company first appeared on the Chinese exchange. It indicates how long a firm in the market and indicates firms with long age have long history accumulate experience and this may help them to incur better performance [ 8 ]. Firm age is a measure of a natural logarithm of the number of years listed from the time that company first listed on the Chinese exchange market. Growth opportunity is measured as the ratio of current year sales minus prior year sales divided by prior year sales. Sales growth enhances the capacity utilization rate, which spreads fixed costs over revenue resulting in higher profitability [ 49 ].

Data analysis methods

Empirical model estimations.

Most of the previous corporate governance studies used OLS, FE, or RE estimation methods. However, these estimations are better when the explanatory variables are exogenous. Otherwise, a system generalized moment method (GMM) approach is more efficient and consistent. Arellano and Bond [ 4 ] suggested that system GMM is a better estimation method to address the problem of autocorrelation and unobservable fixed effect problems for the dynamic panel data. Therefore, to test the endogeneity issue in the model, the Durbin–Wu–Hausman test was applied. The result of the Hausman test indicated that the null hypothesis was rejected ( p  = 000), so there was an endogeneity problem among the study variables. Therefore, OLS and fixed effects approaches could not provide unbiased estimations, and the GMM model was utilized.

The system GMM is the econometric analysis of dynamic economic relationships in panel data, meaning the economic relationships in which variables adjust over time. Econometric analysis of dynamic panel data means that researchers observe many different individuals over time. A typical characteristic of such dynamic panel data is a large observation, small-time, i.e., that there are many observed individuals, but few observations over time. This is because the bias raised in the dynamic panel model could be small when time becomes large [ 75 ]. GMM is considered more appropriate to estimate panel data because it removes the contamination through an identified finite-sample corrected set of equations, which are robust to panel-specific autocorrelation and heteroscedasticity [ 12 ]. It is also a useful estimation tool to tackle the endogeneity and fixed-effect problems [ 4 ].

A dynamic panel data model is written as follows:

where y it is the current year firm performance, α is representing the constant, y it−1 is the one-year lag performance, i is the individual firms, and t is periods. β is a vector of independent variable. X is the independent variable. The error terms contain two components, the fixed effect μi and idiosyncratic shocks v it .

Accordingly, to test the impact of corporate governance mechanisms on firm performance and influencing role of the overconfident executive on the relationship between corporate governance mechanisms and firm performance, the following base models were used:

ROA / TQ i ,t  =  α  + yROA /TQ i,t−1  + β 1 INDBRD + β 2 DUAL + β 3 OWCON +  β 4 DF +  β 5 PMC +  β 6 MOC +  β 7 FSIZE + β 8 FAGE + β 9 SGTH + β 10–14 MOC * (INDBRD, DUAL, OWCON, DF, and PMC) + year dummies + industry Dummies + ή +  Ɛ it .

where i and t represent firm i at time t, respectively, α represents the constant, and β 1-9 is the slope of the independent and control variables which reflects a partial or prediction for the value of dependent variable, ή represents the unobserved time-invariant firm effects, and Ɛ it is a random error term.

Descriptive statistics

Descriptive statistics of all variables included in the model are described in Table 1 . Accordingly, the value of ROA ranges from −0.17 to 0.23, and the average value of ROA of the sample is 0.05 (5.4%). Tobin Q’s value ranges from 0.88 to 10.06, with an average value of 2.62. The ratio of the independent board ranges from 0.33 to 0.57. The average value of the independent board of directors’ ratio was 0.374. The proportion of the CEO serving as chairperson of the board is 0.292 or 29.23% over the nine years. Top 10 ownership concentration of the study ranged from 22.59% to 90.3%, and the mean value is 58.71%. Product market competition ranges from 0.85% to 40.5%, with a mean value of 5.63%. The debt financing also has a mean value of 40.5%, with a minimum value of 4.90% and a maximum value of 87%. The mean value of managerial overconfidence is 0.589, which indicates more than 50% of Chinese top managers are overconfident.

The study sample has an average of 22.15 million RMB in total book assets with the smallest firms asset 20 million RMB and the biggest owned 26 million RMB. Study sample average firms’ age was 8.61 years old. The growth opportunities of sample firms have an average value of 9.8%.

Table 2 presents the correlation matrix among variables in the regression analysis in the study. As a basic check for multicollinearity, a correlation of 0.7 or higher in absolute value may indicate a multicollinearity issue [ 32 ]. According to Table 2 results, there is no multicollinearity problem among variables. Additionally, the variance inflation factor (VIF) test also shows all explanatory variables are below the threshold value of 10, [ 32 ] which indicates that no multicollinearity issue exists.

Main results and discussion

Impact of cg on firm performance.

Accordingly, Tables 3 and 4 indicate the results of two-step system GMM employing the xtabond2 command introduced by Roodman [ 75 ]. In this, the two-step system GMM results indicated the CG and performance relationship, with the interaction of managerial overconfidence. One-year lag of performance has been included in the model and two to three periods lagged independent variables were used  as an instrument in the dynamic model, to correct for simultaneity, control for the fixed effect, and to tackle the endogeneity problem of independent variables. In this model, all variables are taken as endogenous except control variables.

Tables 3 and 4 report the results of three model specification tests to determine whether an appropriate estimation model was applied. These tests are: 1) the Arellano–Bond test for the first-order (AR (1)) and second-order correlation (AR (2)). This test indicates the result of AR (1) and AR (2) is tested for the first-order and second-order serial correlation in the first-differenced residuals, AR (2) test accepted under the null of no serial correlation. The model results show AR (2) test yields a p-value of 0.511 and 0.334, respectively, for ROA and TQ firm performance measurement, which indicates that the models cannot reject the null hypothesis of no second-order serial correlation. 2) Hansen test over-identification is to detect the validity of the instrument in the models. The Hansen test of over-identification is accepted under the null that all instruments are valid. Tables 3 and 4 indicate the p-value of Hansen test over-identification 0.139 and 0.132 for ROA and TQ measurement of firm performance, respectively, so that these models cannot reject the hypothesis of the validity of instruments. 3) In the difference-in-Hansen test of exogeneity, it is acceptable under the null that instruments used for the equations in levels are exogenous. Table 3 shows p-values of 0.313 and 0.151, respectively, for ROA and TQ. These two models cannot reject the hypothesis that the equations in levels are exogenous.

Tables 3 and 4 report the results of the one-year lag values of ROA and TQ are positive (0.398, 0.658) and significant at less than 1% level. This indicates that the previous year's performance of a Chinese firm has a significant impact on the current firm's performance. This study finding is consistent with the previous studies: Shao [ 79 ], Nguyen [ 66 ] and Wintoki et al. [ 89 ], which considered previous year performance as one of the significant independent variables in the case of corporate governance mechanisms and firm performance relationships.

The results indicate board independence has no relation with firm performance measured by ROA and TQ. However, hypothesis 1 indicated that there is a positive and significant relationship between independent board and firm performance, which is not supported. The results are conflicting with the assumption that high independent board on board room should better supervise managers, alleviate the information asymmetry between agents and owners, and improve the firm performance by their proficiency. This result is consistent with several previous studies [ 56 , 79 ], which confirms no relation between board independence and firm performance.

This result is consistent with the argument that those outside directors are inefficient because of the lack of enough information concerning the daily activities of internal managers. Specifically, Chinese listed companies may simply include the minimum number of independent directors on board to fulfill the institutional requirement and that independent boards are only obligatory and fail to perform their responsibilities [ 56 , 79 ]. In this study sample, the average of independent board of all firms included in this study has only 37 percent, and this is one of concurrent evidence as to the independent board in Chinese listed firm simple assigned to fulfill the institutional obligation of one-third ratio.

CEO duality has a negative significant relationship with firm performance measured by TQ ( β  = 0.103, p  < 0.000), but has no significant relationship with accounting-based firm performance (ROA). Therefore, this result supports our hypothesis 2, which proposed there is a negative relationship between dual leadership and firm performance. This finding is also in line with the agency theory assumption that suggests CEO duality could reduce the board’s effectiveness of its monitoring functions, leading to further agency problems and ultimately leads poor firm performance [ 41 , 83 ]. This finding consistent with prior studies [ 15 , 56 ] that indicated a negative relationship between CEO dual and firm performance, against to this result the studies [ 70 ] and [ 15 ] found that duality positively related to firm performance.

Hypothesis 3 is supported, which proposes there is a positive relationship between ownership concentration and firm performance. Table 3 result shows that there is a positive and significant relationship between the top ten concentrated ownership and ROA and TQ (0.00046 & 0.06) at 1% and 5% significance level, respectively. These findings are consistent with agency theory, which suggests that the shareholders who hold large ownership alleviate agency costs and information problems, monitor managers effectively, consequently enhance firm performance [ 81 ]. This finding is in line with Wu and Cui [ 90 ], and Pant et al. [ 69 ]. Concentrated shareholders have a strong encouragement to watch strictly over management, making sure that management does not engage in activities that are damaging to the wealth of shareholders [ 80 ].

The result indicated in Table 3 PMC and firm performance (ROA) relationship was positive, but statistically insignificant. However, PMC has positive ( β  = 2.777) and significant relationships with TQ’s at 1% significance level. Therefore, this result does not support hypothesis 4, which predicts product market competition has a positive relationship with firm performance in Chinese listed firms. In this study, PMC is measured by the percentage of market concentration, and a highly concentrated product market means less competition. Though this finding shows high product market concentration positively contributed to market-based firm performance, this result is consistent with the previous study; Liu et al. [ 57 ] reported high product market competition associated with poor firm performance measured by TQ in Chinese listed firms. The study finding is against the theoretical model argument that competition in product markets is a powerful force for overcoming the agency problem between shareholders and managers, and enhances better firm performance (Scharfstein and [ 78 ]).

Regarding debt finance and firm performance relationship, the impact of debt finance was found to be negative on both firm performances as expected. Thus, this hypothesis is supported. Table 3 shows a negative relationship with both firm performance measurements (0.059 and 0.712) at 1% and 5% significance level. Thus, hypothesis 5, which predicts a negative relationship between debt financing and firm performance, has been supported. This finding is consistent with studies ([ 86 ]; Pant et al., [ 69 ]; [ 77 , 82 ]) that noted that debt financing has a negative effect on firm values.

This could be explained by the fact that as debt financing increases in external loans, the size of managerial perks and free cash flows increase and corporate efficiency decrease. In another way, because the main source of debt financers is state-owned banks for Chinese listed firms, these banks are mostly governed by the government, and meanwhile, the government as the owner has multiple objectives such as social welfare and some national issues. Therefore, debt financing fails to play its governance role in Chinese listed firms.

Regarding control variables, firm age has a positive and significant relationship with both TQ and ROA. This finding supported by the notion indicates firms with long age have long history accumulate experience, and this may help them to incur better performance (Boone et al. [ 8 ]). Firm size has a significant positive relationship with firm performance ROA and negative significant relation with TQ. The positive result supported the suggestion that large firms get a higher market valuation from the markets, while the negative finding indicates large firms are more complex; they may have several agency problems and need additional monitoring, which results in higher operating costs [ 84 ]. Growth opportunity was found to be in positive and significant association with ROA; this indicates that a firm high growth opportunity can increase its performance.

Influences of managerial overconfidence in the relationship between CG measures and firm performance

It predicts that managerial overconfidence negatively influences the relationship of independent board and firm performance. The study findings indicate a negative significant influence of managerial overconfidence when the firm is measure by Tobin’s Q ( β  = −4.624, p  < 0.10), but a negative relationship is insignificant when the firm is measured by ROA. Therefore, hypothesis 2a is supported when firm value is measured by TQ. This indicates that the independent directors in Chinese firms are not strong enough to monitor internal CEOs properly, due to most Chinese firms merely include the minimum number of independent directors on a board to meet the institutional requirement and that independent directors on boards are only perfunctory. Therefore, the impact of independent board on internal directors is very weak, in this situation overconfident CEO becoming more powerful than others, and they can enact their own will and avoid compromises with the external board or independent board. In another way, the weakness of independent board monitoring ability allows CEOs overconfident that may damage firm value.

The interaction of managerial overconfidence and CEO duality has a significant negative effect on operational firm performance (0.0202, p  > 0.05) and a negative insignificant effect on TQ. Thus, Hypothesis 2b predicts that the existence of overconfident managers strengthens the negative relationships of dual leadership and firm performance has been supported. This finding indicates the negative effect of CEO duality amplified when interacting with overconfident CEOs. According to Legendre et al. [ 51 ], argument misbehaviors of chief executive officers affect the effectiveness of external directors and strengthen the internal CEO's power. When the CEOs are getting more powerful, boards will be inefficient and this situation will result in poor performance, due to high agency problems created between managers and ownerships.

Hypothesis 2c is supported

It predicts the managerial overconfidence decreases the positive impact of ownership concentration on firm performance. The results of Tables 3 and 4 indicated that the interaction effect of managerial overconfidence with concentrated ownership has a negative significant impact on both ROA and TQ firm performance (0.000404 and 0.0156, respectively). This finding is supported by the suggestion that CEO overconfidence weakens the monitoring and controlling role of concentrated shareholders. This finding is explained by the fact that when CEOs of the firm become overconfident for a certain time, the concentrated ownership controlling attention is weakened [ 20 ], owners trust the internal managers that may damage the performance of the firms in an emerging market where external market control is weak. Overconfident managers gain much more power than rational managers that they are able to use the firm to further their own interests rather than the interests of shareholders and managerial overconfidence is a behavioral biased that managers follow to meet their goals and reduce the wealth of shareholders. This situation resulted in increasing agency costs in the firm and damages the firm profitability over time.

It predicts that managerial overconfidence moderates the relation of product market competition and firm performance. However, the result indicated there is no significant moderating role of managerial overconfidence in the relationship between product market competition and firm performance in Chinese listed firms.

It proposed that overconfidence managers moderate the relationship of debt financing and performance in Chinese listed firm: The study finding is unobvious; it negatively influenced the relation of debt financing with accounting-based firm performance measure ( β  = −0.059, p  < 0.01) and positively significant market base firm performance ( β  = 0.735, p  < 0.05). The negative interaction results could be explained by the fact that overconfident leads managers to have lower debt due to overestimate the profitability of investment projects and underestimate the related risks. This finding is consistent with [ 38 ] finding that overconfident CEOs have lower debt, because of overestimating the investment projects. In another perspective, the result indicated a positive moderating role of overconfidence managers in the relationship of debt financing and market-based firm performance. This result is also supported by the suggestion that overconfident managers have better in accessing debt rather than rational managers in the context of China because in Chinese listed firms most of the senior CEOs have a better connection with the external finance institutions and state banks to access debt, due to their political participation than rational managers.

The main objectives of the study were to examine the impact of basic corporate governance mechanisms on firm performance and to explore the influence of managerial overconfidence on the relationship of CGMs and firm performance using Chinese listed firms. The study incorporated different important internal and external corporate governance control mechanisms that can affect firm performance, based on different theoretical assumptions and literature. To address these objectives, many hypotheses were developed and explained by a proposing multi-theoretical approach.

The study makes several important contributions to the literature. While several kinds of research have been conducted on the relationships of corporate governance and firm performance, the study basically extends previous researches based on panel data of emerging markets. Several studies have investigated in developed economies. Thus, this study contributed to the emerging market by providing comprehensive empirical evidence to the corporate governance literature using unique characteristics of Chinese publicity listed firms covering nine years (2010–2018). The study also extends the developing stream of corporate governance and firm performance literature in emerging economies that most studies in emerging (Chinese) listed companies give less attention to the external governance mechanisms. External corporate governance mechanisms like product market competition and debt financing are limited from emerging market CG literature; therefore, this study provided comprehensive empirical evidence.

Furthermore, this study briefly indicated how managerial behavioral bias can influence the monitoring, controlling, and corporate decisions of corporate firms in Chinese listed firms. Therefore, as to the best knowledge of the researcher, no study investigated the interaction effect of managerial overconfidence and CG measures to influence firm performance. Thus, the current study provides an insight into how a managerial behavioral bias (overconfidence) influences/moderates the relationship between corporate governance mechanisms and firm performance, in an emerging market. Hence, the study will help managers and owners in which situation managerial behavior helps more for firm’s value and protecting shareholders' wealth (Fig. 1 ).

Generally, the previous findings also support the current study's overall findings: Phua et al. [ 71 ] concluded that managerial overconfidence can significantly affect corporate activities and outcomes. Russo and Schoemaker [ 76 ] found that there is opposite relationship between overconfidence managers and quality of decision making, because overconfident behavioral bias reduces the ability to make a rational decision. Therefore, the primary conclusion of the study is that it attempts to understand the strength of the effect of corporate governance mechanisms on firm performance, and managerial behavioral bias must be taken into consideration as one of the influential moderators.

Proposed research model framework

Availability of data and material

I declare that all data and materials are available.

Abbreviations

China accounting and finance center

Chief executive officer

• Corporate governance

Corporate governance mechanisms

China Stock Market and Accounting Research

China Securities Regulatory Commission

Generalized method of moments

• Managerial overconfidence

Research and development

Return on asset

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Guluma, T.F. The impact of corporate governance measures on firm performance: the influences of managerial overconfidence. Futur Bus J 7 , 50 (2021). https://doi.org/10.1186/s43093-021-00093-6

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The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research

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In this article, we review recent archival research articles (98 studies) on the impact of corporate governance on restatements, enforcement activities and fraud as corporate financial misconduct. Applying an agency-theoretical view, we mainly differentiate between four levels of corporate governance (group, individual, firm, and institutional level). We find that financial restatements on the one hand and the group and individual level of corporate governance on the other hand are dominant in our literature review. Enforcement actions and fraud events as misconduct proxies, and the firm and institutional level of corporate governance are of lower relevance yet. The following review highlights that many studies on corporate governance find inconclusive results on firms’ financial misconduct. But there are indications that board expertise and especially gender diversity in the top management decreases firms’ financial misconduct. We know very little about the impact of non-shareholder stakeholders’ monitoring role on misconduct yet. In discussing potential future research, we emphasize the need for a more detailed analysis of misconduct proxies, recognition of moderator and especially mediator variables, especially in the interplay of the board of directors and external auditors.

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1 Introduction

In light of prominent financial scandals (e.g., Enron, Worldcom, Wirecard), a proper financial reporting quality is crucial for stakeholder trust. Firm’s financial misconduct can lead to massive negative consequences for capital providers, employees, customers, suppliers and the whole economy. During the last years, many controversial discussions arise which mechanisms may prevent or even discover unethical and opportunistic behavior of firms. In view of this relevance, this systematic literature review focusses on archival research on the relationship between corporate governance and firms’ financial misconduct. In line with Amiram et al. ( 2018 ), we define firms’ financial misconduct as violations of national and/or international accounting and related business law regulations and standards. Thus, we make a clear distinction between earnings management and firms’ financial misconduct. Footnote 1 We are aware of the fact that discretionary accruals and related proxies for earnings management may be significant predictors of firms’ financial misconduct (Amiram et al. 2018 ), leading to a “grey zone” between earnings management and violations of accounting standards. While the US-American literature does not clearly separate between earnings management and violations, the Continental European accounting literature mainly stresses that earnings management is in line with the respective law and standards (e.g., Hirschler 2021 ). We refer to this assumption, exclude studies on the link between corporate governance and earnings management and refer to prior literature reviews and meta-analyses (e.g., Garcia-Meca and Sanchez-Ballesta 2009 ; Lin and Hwang 2010 ).

Referring to the corporate governance framework by Jain and Jamali ( 2016 ), we separate our corporate governance variables into four levels: group, individual, firm, and institutional level. We identify financial restatements, fraud events and enforcement activities as three main categories of firms’ financial misconduct, representing a major threat for capital markets (Brody et al. 2012 ; Hammersley 2011 ). We are aware of the fact that restatements are not necessarily the result of fraud, as unintentional errors may also result into restatements. Firms’ financial scandals lead to decreased trust between corporations, gatekeepers, market participants, and other stakeholder groups, because firms may go bankrupt or may have extreme financial problems if these scandals go public (Brody et al. 2012 ). There is empirical evidence that negative financial consequences, e.g., major losses in firm valuation, and increased capital costs, or higher executive turnover will follow (Habib et al. 2020 ). We note the famous Enron scandal and the insolvency of Wirecard, one of the former “DAX 30” fintech group companies in Germany, as prominent examples for a big loss in capital market trust. Many national and international legislators, e.g., the European Commission and the British Government, currently discuss future corporate governance regulations, e.g., whistleblowing systems or risk management tools.

According to the famous fraud triangle by Cressey ( 1953 ), Footnote 2 the possibility of firms’ misconduct is based on three conditions. First, incentives and pressures must be existent to commit misconduct. Second, there must be an attitude or a rationalization committing misconduct. Third, there must be any circumstance which provides an incentive or an opportunity for misconduct. Incentives or opportunities may be caused by ineffective monitoring of top management, complex organizational structures or ineffective controls due to a lack of monitoring of controls or circumvention of controls. In line with agency theory, internal and external corporate governance as monitoring mechanisms should decrease executives’ opportunities for financial misconduct. In a traditional sense, corporate governance “deals with the ways in which suppliers of finance to corporations assure themselves on getting a return on their investment” (Shleifer and Vishny 1997 ). As we also like to integrate other stakeholder groups, we refer to the corporate governance definition as “the combination of mechanisms which ensure that the management […] runs the firm for the benefit of one or several stakeholders” (Goergen and Renneboog 2006 ). We use this broad definition of corporate governance, because we believe that the fate of a firm not only depends on the relations between management and shareholders, but also on the relation between management and other stakeholders who provide non-financial resources to the firm (Freeman 1984 ).

In our literature review, based on 98 studies, we analyze whether corporate governance variables on four different levels (group, individual, firm, and institutional level) are linked with the probability of firms’ financial misconduct. With regard to the group level as the dominant category in our literature review, we separate between (1) board composition, (2) board compensation, (3) audit committees and the internal audit function as monitoring institutions. The individual level of corporate governance refers to specific characteristics of the Chief Executive Officer (CEO) and/or the Chief Financial Officer (CFO) in view of their major impact on financial reporting quality. The firm level of corporate governance can be divided into ownership structure and monitoring by other stakeholders. Last but not least, our review also includes legal enforcement as part of the institutional level of corporate governance. We exclude the external auditor as a main determinant of the prevention of financial misconduct in view of the massive research activity on this topic and other specific literature reviews on that topic (e.g., Hogan et al. 2008 ; Trompeter et al. 2014 ). During the last decade, various studies have been conducted to measure the impact of corporate governance on firms’ financial misconduct, showing heterogeneous results (Habib et al. 2020 ). Financial restatements can be classified as the most important variable of firms’ financial misconduct in prior research (e.g., Karpoff et al. 2017 ). This can be easily explained by methodological reasons. Empirical-quantitative research requires an adequate number of observations and comparable proxies. As financial restatements are a common practice in business life and several databases exist (e.g., audit analytics), researchers like to choose financial restatements as a proxy of financial misconduct (Hasnan et al. 2013 ). The other two categories, enforcement activities and fraud evens, are of lower relevance in empirical-quantitative research yet (e.g., Hasnan et al. 2013 ). This can be explained by the lower practical relevance of fraud events and enforcement activities and the lower validity of databases which decreases the number of observations for the researchers.

Our goal is to examine the overall relationship between corporate governance and firms’ financial misconduct in prior studies. Thus, to gain an adequate level of comparability within the included studies, we only include archival studies as dominant research method in this research topic. Moreover, as archival research related to our research strength heavily relies on the US-American capital market and is mainly influenced by the Sarbanes Oxley Act (SOX) of 2002 (DeFond and Zhang 2014 ), we only include post-SOX-studies (starting with the business year 2006). Corporate governance was massively changed by the SOX as a reaction of the Enron scandal (DeFond and Zhang 2014 ). The increased regulations on audit committee provisions, internal control audits, inspections of the Public Company Accounting Oversight Board (PCAOB) and proscription of non audit services have a main impact of corporate governance quality and their impact on financial restatements, enforcement actions and fraud. Thus, research designs pre and post SOX are not comparable. Including both domestic and foreign issuers on the US-American capital market, the before mentioned corporate governance regulations had to be fulfilled for the business year 2006 for the first time. As a consequence, we only include research designs that include at least the business year 2006. After the passing of the SOX) of 2002, several countries implemented similar regulations, so that the SOX is likely to be an international catalyst for a global corporate governance reform initiative during the last two decades.

We stress a growing amount of literature reviews on firms’ financial misconduct in general (e.g., Sievers and Sofilkanitsch 2019a , b ) and on related misconduct measures (e.g., Karpoff et al. 2017 ; Sellers et al. 2020 ). We identify two meta-analysis on the impact of corporate governance on financial restatements (Habib et al. 2020 ) and on the link between board independence and corporate misconduct (Neville et al. 2019 ). We see a major research gap on conducting a literature review on prior corporate governance research in view of the following reasons: First, archival corporate governance research has been increased during the last decade and show heterogeneous results, leading to first meta-analyses (Habib et al. 2020 ; Neville et al. 2019 ). Prior meta-analyses have used different methods, variables, and moderators, stressing the need to the structure the main research strengths by a narrative literature review. As meta-analyses and structured literature reviews represent separate research methods with different aims, there is a need for a literature review on the respective topic in line with prior meta-analyses. Second, in line with agency theory, it is questionable whether corporate governance is really linked with reduced firm’s financial misconduct. We thus like to analyze whether corporate governance represents a monitoring tool to decrease information asymmetry between management and shareholders and increase financial reporting quality and which specific variables contribute to this link. In contrast to Habib et al. ( 2021 ), we do not only concentrate on financial restatements and we do not include external audit proxies. We also refer to a corporate governance framework with a clear structure of corporate governance levels in contrast to Habib et al. ( 2021 ). In contrast to Neville et al. ( 2019 ), we are not only interested in the impact of board independence on corporate misconduct. Moreover, as meta-analyses have different goals in comparison to structured literature reviews, focusing on narrative results and tendencies of prior research instead of statistical correlations, we make a main contribution to prior meta-analyses on related topics. Our aim is not to test statistical correlations but to identify major tendencies of prior research, stress the variety of included proxies and deduce fruitful recommendations for future research designs.

Referring to existing literature reviews on our research topic, prior analyses did not restrict their sample on financial misconduct, but also include other measures of financial reporting quality as earnings management (e.g., Ploeckinger et al. 2016 ) or other determinants of financial misreporting (e.g., Sievers and Sofilkanitsch 2019a , b ; Tutino and Merlo 2019a , b ). Other researchers restrict their analysis on selective corporate governance variables and restatements (e.g., Street and Hermanson 2019 ). As we already noted, we like to conduct a different strategy.

As a consequence, we make main contributions to prior literature reviews on that topic. First, we rely on archival research (post-SOX years) on the impact of corporate governance on various proxies of firm’s financial misconduct in view of the massive impact of the SOX on corporate governance and the dominant use of the US-American capital market in our sample. Second, we clearly differentiate between four levels of corporate governance for the first time on the one hand due to a corporate governance framework, and three categories of misconduct (restatements, enforcement activities, and fraud events) on the other hand. With the help of this structure, we list and compare the various corporate governance variables and deduct limitations and recommendations for future research.

Our review of 98 archival studies stresses major gaps in recent corporate governance research and highlights key challenges that researchers face in their research designs. First, our review stresses that financial restatements as misconduct proxy and the group and individual level of corporate governance represent the most important categories in our literature review. Enforcement and fraud events, and the firm and institutional level of corporate governance are of lower relevance yet. Our review also highlights that many studies on corporate governance variables find inconclusive results on firms’ financial misconduct. But there are indications that expertise and especially gender diversity (on the board, on audit committees and female CEOs) decrease firms’ financial misconduct. However, we know very little about the impact of other non-shareholding stakeholders as a monitoring tool on misconduct. Second, in discussing potential future research, we emphasize the need for a more detailed analysis of restatements proxies, recognition of moderator and especially mediator variables, and increased inclusion of interactions between audit committees and external auditors.

Our analysis is structured as follows: First, we present an agency-theoretical foundation and our research framework, stressing our corporate governance framework and related determinants of firms’ financial misconduct and the three main categories of misconduct (Sect.  2 ). Next, we present the key results of our literature review, whereas we differentiate between several characteristics of internal and external corporate governance (Sect.  3 ). Our analysis continues with a discussion of our results and research recommendations (Sect.  4 ). Section  5 provides a conclusion to our analysis.

2 Agency-theoretical framework of included corporate governance and misconduct variables

2.1 corporate governance measures.

The link between corporate governance and firms’ financial misconduct can be motivated by various theories (e.g., stakeholder theory, legitimacy theory, resource-based view; see Habib et al. 2021 ). As the majority of included studies in this literature review referred to agency theory (Ross 1973 ; Jensen and Meckling 1976 ), we also use this theoretical approach. Based on the separation of ownership and control, Jensen and Meckling ( 1976 ) characterize the overarching problem of information asymmetries between management and shareholders, resulting in moral hazards and self-serving actions. To decrease those agency conflicts, there is a need to implement strong monitoring mechanisms by the board of directors and its shareholders. Information asymmetries arise in the financial reporting documents, as financial reporting quality may be reduced by errors and fraud, leading to restatements, enforcement activities and fraud events, which may go public. The real economic performance of the firm is not obvious in these situations and impair the information function of the shareholders. Effective corporate governance should put pressure on top managements to prevent or at least reduce firms’ financial misconduct, leading to fewer restatements, enforcement actions or fraud events (Jensen and Meckling 1976 ). Corporate governance can be classified as a monitoring tool in line with shareholders’ interests of ethical management behaviour. We expect that increased corporate governance quality is linked with better financial reporting quality and thus lower probability of firms’ financial misconduct.

In the following, we present the structure of our corporate governance variables. As there are many different corporate governance frameworks in the literature (e.g., Cohen et al. 2004 ), we rely on the framework by Jain and Jamali ( 2016 ) who differentiate four levels of corporate governance. (1) The group level of corporate governance mainly relates to the board as a mechanism for monitoring managers to avoid agency conflicts (Jain and Jamali 2016 ). Board structure (e.g., independence), social capital and resource network and demography are main proxies in this context. In our literature review, we distinguish between three main categories of the group level: board composition, board compensation and audit committees and the internal audit function. (2) The individual level of corporate governance addresses demographic or socio-psychological characteristics of specific members of the top management. The CEO and the CFO represent the two most important persons who are included in prior empirical corporate governance research. Thus, we include CEO and/or CFO characteristics, e.g., narcissism, or tenure, in this level. (3) The firm level of corporate governance mainly concentrates on ownership structure (e.g., blockholding, ownership concentration; Jain and Jamali 2016 ). During the last years, also other stakeholders monitor the board of directors, e.g., financial analysts or rating agencies. Thus, we separate between ownership structure and monitoring by other stakeholders. (4) Last but not least, the institutional level of corporate governance includes formal institutions, e.g., political, legal, and financial systems, as well as information institutions, e.g., socially valued beliefs and norms (Jain and Jamali 2016 ).

2.2 Group level

The group level of corporate governance is mainly linked to the composition of the board, its committees and the internal audit function. Main board variables include board independence, expertise, gender diversity, networks and social ties and may lead to increased quality of financial reporting. Management should act in line with shareholders’ interests in preventing financial misconduct. The board of directors, at the apex of internal control systems, advise and monitor the management (executive directors) and has to duty to hire, fire, and to compensate the senior management (Gillan and Starks 2000 ; Shleifer and Visny 1997 ). Agency theory assumes that proper board composition and compensation leads to increased validity of financial reporting and ethical behaviour (Jensen and Meckling 1976 ). Based on agency theory, in our literature review, we assume that effective board composition will have a negative impact of the occurrence of firms’ financial misconduct.

Next to board composition, we introduce the audit committee as a central monitoring authority of the management, as well as of the internal and external auditor, and it informally shares information with all three corporate governance bodies (Pomeroy and Thornton 2008 ). The major role of audit committees is even higher in one-tier-systems in comparison to two-tier-system, as the audit committee represents the only institution in the one-tier-system which monitors the executive directors. Thus, even though the management prepares the financial reports, the audit committee has a significant shared responsibility for the achievement of adequate quality, for instance through the financial audit (Ghafran and O’Sullivan 2013 ). The audit committee also performs important monitoring activities in relation to external auditor independence which may also be compromised by non-audit services, or by generating adequate internal audit resources (Velte 2017 ). These activities may result in decreased information asymmetry and conflict of interests between executives and shareholders, leading to better firm reputation and firm valuation. Based on corporate governance regulations after the Enron scandal in the USA, independence from the management and financial expertise are strengthened to ensure appropriate monitoring (Velte and Stiglbauer 2011 ). But also other kinds of expertise, gender, and network are currently discussed. As a result, audit committee effectiveness should be connected with decreased restatements, enforcement actions and fraud events. In line with the audit committee, the internal audit function also represents a key monitoring institution within the firm. As internal auditors also advise the top management members, independence is a crucial factor (Ege 2015 ). As internal auditors should closely cooperate with audit committees and the external auditor, we assume that increased internal audit will lead to reduced financial misconduct (Ege 2015 ).

As a third category of the group level of corporate governance, incentive-based board compensation is a classic tool for overcoming conflicts of interest between management and investors (Lynch and William 2012 ). While it is recognized that executive compensation should comprise a balanced mix of fixed and performance-related components, long-term incentives have played a key role since the financial crisis in 2008/09. But management compensation arrangements are heterogeneous from an international perspective and no consensus has been found (Campbell et al. 2015 ). Executive compensation systems should differ from non-executives’ payments in order to decrease conflict of interests between those two parties (Jensen and Murphy 1990 ). Thus, many firms rely on non-executive compensation packages comprising only fixed components for non-executives, e.g., audit committee members. In line with compensation structure, the amount of board compensation is a major challenge in corporate governance research (Jensen and Murphy 1990 ). “Excessive” compensation and the non-existence of pay-for-performance-sensitivity of remuneration contracts increase shareholders’ concerns. This can be explained by decreased payouts for shareholders, if management compensation increases while firm performance decreases (Jensen and Meckling 1976 ). Thus, reliance on short-term financial goals in compensation contracts and excessive payment will lead to increased firms’ financial misconduct. Top managers may hide their unsuccessful strategies by book-related increases in short-term financial performance while the real business transactions are not linked to this increase. Information asymmetries will be higher because financial reporting quality is reduced and shareholders cannot analyze the real economic profit. Thus, we assume that short-term compensation and excessive compensation for executives will be connected with increased firms’ financial misconduct.

2.3 Individual level

The individual level of corporate governance is directly linked with upper echelons theory (Hambrick and Mason 1984 ) as the relevance of individual top management characteristics and incentives, especially the chief executive and the chief financial officer (CEO; CFO) can be easily motivated by this theory. Cognitive characteristics and individual values dominate the decision of top management members with a major influence on the second tier managers and other employees. As the measurement of psychological influencing factors is difficult in business practice, Hambrick and Mason ( 1984 ) recommended to primarily rely on demographic characteristics, e.g. age, gender. Two key factors have been deducted in several modifications of classical upper echelons: (1) extent of managerial discretion and executive job demands (Hambrick 2007 ). In this literature review, we assume that upper echelons theory explains the impact of CEO/CFO incentives and characteristics on firms’ financial misconduct. We rely on the assumption that the influence of a CEO/CFO is intensive within a top management team and within the firm in order to influence (un)ethical reporting strategies significantly. In this context, upper echelons theory assumes that not group-related determinants within the board of directors, but the central role of the CEO/CFO itself may be the crucial factor in influencing financial misconduct.

2.4 Firm level

With regard to the residual claim of principals’ stocks and the assumption of homogeneous shareholders’ preferences (Fama and Jensen 1983 ), dispersed ownership leads to the delegation of the management to executives as agents by investors as principals. Information asymmetry between managers and investors results in moral hazards and self-serving actions because of conflicts of interests between both parties (Harris and Bromiley 2007 ). To decrease those agency conflicts, investors will implement monitoring mechanisms, e.g., say on pay votings on management compensation. Ownership structure as a key category of firm level of corporate governance can be divided into different characteristics, e.g., institutional ownership, family ownership, state ownership, and foreign ownership, with a dominance of prior research on institutional ownership. In contrast to private investors, institutional investors are companies or organizations that invest money on behalf of other people or organizations. Main examples are mutual funds, pensions, and insurance companies. Institutional investors buy and sell significant amount of stocks, bonds, or other securities. Many institutional investors fulfil an active monitoring function within the corporate governance system due to their main shareholder influence, strategic goals and their increased financial experience and expertise. Thus, institutional ownership should lead to reduced firms’ financial misconduct. Similar associations can be transferred to family, state, and foreign ownership as active monitors.

In line with shareholders, other related stakeholders can fulfil a major monitoring function. Financial analysts are of major relevance of shareholders as they may impose discipline on misbehaving managers and help align the interest of managers with that of the shareholders (Shi et al. 2017 ). They should improve management incentives to provide credible and transparent financial reporting and a more ethical behavior (Habib et al. 2020 ). In line with external auditors, financial analysts fulfil a gatekeeper function for the capital market, e.g., by their rating results on firms and investment recommendations (Bradley et al. 2017 ). Finally, according to classical agency theory, information asymmetries and conflicts of interests are restricted to shareholders as the principals. However, the goals of other stakeholders may be also relevant in corporate governance, leading to sustainable corporate governance (Amis et al. 2020 ). In view of this theoretical extension, other stakeholder groups, e.g., customers, suppliers, or the whole society may also put pressure on the management to decrease firms’ financial misconduct.

2.5 Institutional level

In our literature review, we mainly rely on legal factors or formal institutions as a key component of the institutional level of corporate governance. As a reaction to financial scandals during the last decades, many regulators implemented enforcement institutions to monitor the reliability of financial accounting in line with external auditors (Gunny and Zhang 2013 ). Based on our agency theoretical foundation, major information asymmetries and conflicts of interests may even exist after the recognition of audit committees and external auditors. An independent oversight body that controls the audits of public companies may also strengthen top management incentives to create a sound financial reporting in line with the law (Johnson et al. 2018 ). We already noted that prior archival research on corporate governance mainly focused on the US capital market. As a reaction to the Sarbanes Oxley Act of 2002, the US government introduced the Public Company Accounting Oversight Board (PCAOB). The PCAOB oversees the audits of public companies and other issues in order to protect the interests of shareholders and further the public interest in the preparation of informative, accurate and independent audit reports (Gunny and Zhang 2013 ). The PCAOB legislations are supervised by the Securities and Exchange Commission (SEC). The PCAOB periodically issues inspection reports of registered public accountants. PCAOB inspections should not only incentive audit firms, but also support their related clients (e.g., audit committees) to monitor external audit quality. Thus, we assume that stricter oversight rules will strengthen corporate governance quality, leading to a prevention or reduction of firms’ financial misconduct.

The included corporate governance variables in this literature review are presented in Table 1 , illustrating the complexity of research.

2.6 Restatements, enforcement activities and fraud

We already mentioned that we differentiate between three main categories of firms’ financial misconduct: (1) restatements; (2) enforcement activities and (3) fraud events . We also noticed that we exclude earnings management proxies in order to guarantee a greater comparability of the results. Firms’ restatements of financial statements represent the most important measure of firms’ financial misconduct in archival research (Karpoff et al. 2017 ) due to methodological reasons. Sievers and Sofilkanitsch ( 2019a , b ) define restatements as firms` acknowledgement of former reporting failures and correction of intentional and/or unintentional misreporting. Financial restatements can be a consequence of errors, frauds, or GAAP misapplications. Thus, restatements can be fraud-related or not. However, most restatements (approximately 98%) are linked to unintentional misreporting, e.g., “mistakes” or “clerical errors”, in contrast to “fraud” or “manipulation” cases (Chen et al. 2014 ). Literature assumes restatements to be the most readily available indicator of low financial reporting and audit quality (Christensen et al. 2019 ). The majority of studies included in our literature review interpret financial restatements as an inverse measure of financial reporting quality. However, restatements also depend on a successful detection by monitors and announcement of past reporting. Restatements may also indicate strict corporate governance activities in the past (Srinivasan et al. 2015 ). Executives who are confronted with increased monitoring pressure, e.g., by audit committees, are more likely to agree with correcting prior financial statements (Pyzoha 2015 ). However, restatements are mainly perceived and applied as a proxy for low corporate governance quality because restatements are often linked with initial undetected misreporting rather than to a subsequent successful detection of misreporting. US-American studies heavily use two major databases for restatement selection: the databases by the Government Accountability Office (GAO) and by Audit Analytics (AA) (Karpoff et al. 2017 ).

In contrast to financial restatements, the presence of fraud charges under regulatory enforcement actions (e.g., Karpoff et al. 2017 ) is also relevant to measure firms’ financial misconduct. In the USA, since 1982, the SEC has issued Accounting and Auditing Enforcement Releases (AAER) during or at the conclusion of an investigation against a company, an auditor, or an officer for alleged accounting and/or auditing misconduct. The data is provided by the Center for Financial Reporting and Management (CFRM) at the University of Berkeley (Karpoff et al. 2017 ). Similar databases including enforcement actions also exist for other regimes, e.g., the China Stock Market and Accounting Research Database (CSMAR). Finally, there is also a possibility to approximate financial fraud risks by financial statement anomalies that can result from income manipulation or other types of fraudulent activities. Beneish ( 1999 ) established an “M-score” and included eight indicators, e.g., sales in receivable index or depreciation index.

Our research framework and the main variables are presented in Fig.  1 .

Research framework on the link between corporate governance and firm’s financial misconduct

3 Research on the link between corporate governance and firm’s financial misconduct

3.1 sample selection and content analysis.

We stress an increased heterogeneity in empirical research on the link between corporate governance and firms’ financial misconduct due to collected data, study designs, theoretical foundations, and analytical models. We relied on established processes for this structured literature review (Denyer and Tranfiels 2009 ). Relevant studies were scanned by (inter)national databases (EBSCO Business Source Complete, Web of Science, Google Scholar, and SSRN). We used the terms “restatement”, “fraud”, “manipulation”, “error”, “irregularity”, “revision”, “misconduct”, “misreporting” and “misstatements” and combined these terms with “corporate governance”, “board composition”, “compensation”, “audit committees”, “board network”, “board expertise”, “board experience”, “ownership structure”, “ownership”, “enforcement”, and related terms. We also include relevant keywords for stakeholder groups, e.g., “customers”, “suppliers”, “financial analysts”, “media”. The goal of our literature review is to gain an appropriate level of comparability within the included studies. Thus, only archival research as the most important research method on this topic is included. We did not include analytical, experimental and qualitative papers. As already noted, we did not include studies on the impact of the external auditor (as independent variable) on firms’ financial misconduct. Research on the link between external auditors and firms’ financial misconduct has massively increased during the last years and justifies a separate review. We stress that some researchers already conducted literature reviews on external auditors’ role (e.g., Hogan et al. 2008 ; Trompeter et al. 2014 ). This may explain our exclusion strategy. However, we include external auditor factors as possible moderator or mediator variables of corporate governance proxies. We also noted in the introduction that we exclude earnings management as main proxy of financial reporting quality in our literature review in view of the following reasons. First, as we like to increase the comparability of our included studies, we only focus on those studies, which clearly have a link on firms’ financial misconduct as violations of recent accounting standards and related regulations. Second, as prior research also focusses on literature reviews or meta-analyses between corporate governance and earnings management (e.g., Garcia-Meca and Sanchez-Ballesta 2009 ), we like to contribute to the literature and stressing useful research recommendations for this specific topic. Earnings management includes legal options to influence the financial reporting for specific firm goals, e.g., profit maximization. Possible examples are the voting right according to IAS 16 to conduct a revaluation of property, plant and equipment (fair value accounting) in comparison to historical cost accounting. As investors and other stakeholders will be informed about these accounting practices in the notes, it is easier for them to analyze the real profit situation within the firm. Violations of the accounting standards, e.g., a full fair value accounting of property, plant and equipment according to the German commercial law, cannot be clearly analyzed by the stakeholders, leading to massive information asymmetries. While we stress a dominant research activity on the US capital market, this review does not include a limitation on a special regime. Prior studies also analyze the non-US environment, mainly Asian regimes. After the passing of the Sarbanes Oxley Act (SOX) of 2002, several countries implemented similar regulations, so that the SOX is likely to be an international catalyst for a global corporate governance reform initiative during the last two decades. We only include empirical studies whose sample covers the period after the commencement of the SOX 2002, and which use multivariate statistics. Including both domestic and foreign issuers on the US-American capital market, the corporate governance regulations of the SOX had to be fulfilled for the business year 2006 for the first time. As a consequence, we only include research designs that include at least the business year 2006. Apart from the increased complexity of the findings, leading to a temporal limitation of the studies, the increased regulatory density makes a comparison between US-based studies before and after the SOX impossible. Given that research is predominantly focused on the US capital market, the temporal limitation is adequate. A total of 132 studies have been identified. For quality assurance reasons, only the contributions published in international journals with double-blind review have been included. This resulted in a sample reduction by 34 papers to a final sample of 98 studies.

Included studies were coded with regard to the selected auditor-related (sub-)determinants of firms’ financial misconduct, and were matched to our research framework. Significant findings and their indicators were reported as vote-counting technique (Light and Smith 1971 ).

Table 2 provides an overview of the papers per publication year (Panel A), region (Panel B), journal (Panel C), independent variable (Panel D) and dependent variabe (Panel E). Panel A reported a steady increase in studies over the last few years. The years 2018 and 2019 were most important year due to the amount of included studies (16/17 studies). Most of the included studies addressed the US-American setting (59 studies) in comparison to other settings. With one exception, we do not indicate any cross-country settings. Panel C illustrates a great heterogeneity of the journal publications, regarding discipline and quality. Most papers have been published in Accounting and Finance journals (70 studies). The best-known publication outlets are for example, Journal of Business Ethics (11 studies), Contemporary Accounting Research (9 studies), Journal of Accounting and Economics (5 studies), Journal of Business Finance and Accounting (5 studies), and The Accounting Review (5 studies). Panel D stresses a great research focus on the group level (56 studies) and individual level (30) of corporate governance. Panel E indicates that financial restatement studies are most important in our literature review (50), while enforcement actions and fraud events are of lower relevance yet.

3.2 Group level

3.2.1 board composition.

Board independence Prior research results stressed a heterogeneous relationship between board independence and financial misconduct from an international perspective. Some researchers found a negative relationship between board independence and restatements (Baber et al. 2012 ), enforcement actions (Romano and Guerrini 2012 ), and fraud (Razali and Arshad 2014 ; Khoufi and Khoufi 2018 ). Verriest et al. ( 2013 ) stated a positive impact of board independence on restatements, relying on a European setting. However, most included studies in this literature review did not report any significant impact on restatements (Hasnan et al. 2020 ), enforcement actions (Ghafoor et al. 2019 ; Hasnan et al. 2013 ; Inya et al. 2018 ; Yang et al. 2017 ) and fraud events (Shan et al. 2013 ; Tan et al. 2017 ).

Board expertise Research on board expertise is linked with heterogeneity of included proxies. Managerial ability (Demerjian et al. 2013 ), executive skills (Rubin and Segal 2019 ), foreign independent directors (Du et al. 2017 ), academic experience of executives (Ma et al. 2019 ) are negatively related to restatements. Ma et al. ( 2019 ) also stressed a moderator effect of inefficient external monitoring on that link. Inya et al. ( 2018 ) documented a negative influence of independent directors with more experience and longer tenure on enforcement actions. Moreover, based on a Canadian sample, independent directors who reside close to a firm’s headquarter reduce the probability of restatements, but US directors increase it. According to Du et al. ( 2017 ), the negative link is only existent in non-state owned firms. Razali and Arshad ( 2014 ) documented that international board experience decreases fraud risk. Xiang and Zhou ( 2020 ) found that academic independent directors decrease commission of fraud and increase fraud detection, moderated by accounting and legal background of the board members. We also note contrary research results, as board experience and expertise may lead to increased financial misconduct. Background homogeneity of executives (Zhang 2017 ) and board functioning (Verriest et al. 2013 ) are linked with increased restatements. Foreign independent directors (Masulis et al. 2012 ) are connected with higher restatements due to irregularities, but not with other restatements. Moreover, there are indications that founders on the board (Hasnan et al. 2013 ) and malays director on the board (Nasir et al. 2019 ) increase enforcement actions. Few studies concentrate on board gender diversity and reported a negative impact on restatements (Wahid 2019 ), enforcement actions (Ghafoor et al. 2019 ), and fraud events (Capezio and Mavisakalyan 2016 ; Cumming et al., 2015 ; Marzuki et al. 2019 ). In this context, Wahid ( 2019 ) included board connections as a mediator and found significant results.

Board networks In line with board expertise, we note a variety of board network variables in this literature review. Board interlocks to misstating firms (Omer et al. 2020 ), and political connections to Republican candidates (Notbohm 2019 ) are related to decreased restatements. According to Kuang and Lee ( 2017 ), external social connectedness of independent directors is related to fewer fraud detection given occurrence of fraud, but not to fraud existence. Correia ( 2014 ) found a negative impact of political connections of executives through contributions and lobbying on enforcement actions. The author included the following moderator variables and documented a significant effect: recipients as the high-ranking members of the committees with the highest control over the SEC and long-term repeated relationship with the firm, lobbying firms with connections to the SEC or direct lobbying. Kong et al. ( 2019 ) also stressed that politically connected independent directors with local, central or both backgrounds are related with fewer enforcement actions. In contrast to these results, board interlocks (Jiang and Zhao 2020 ) also increase enforcement activities. Moreover, we note some insignificant links between political connections and enforcement actions (Ghafoor et al. 2019 ; Hasnan et al. 2013 ), and between multiple directorships and restatements (Hasnan et al. 2020 ).

Board size Khoufi and Khoufi ( 2018 ) represents the only study with a negative impact of board size on fraud events. Other included studies did not find any significant influence of board size on restatements (Hasnan et al. 2020 ), enforcement activities (Romano and Guerrini 2012 ), and fraud (Razali and Arshad 2014 ; Salleh and Othman 2016 ; Shan et al. 2013 ; Tan et al. 2017 ). This is in line with prior research on board size on other dependent variables, e.g., firm performance, stressing the heterogeneous character of this corporate governance proxy.

Board meeting frequency We note just two studies on the link between board meeting frequency and financial misconduct. While Salleh and Othman ( 2016 ) stressed a decreased amount of fraud events, Shan et al. ( 2013 ) reported an opposite link.

Board age Xu et al. ( 2018 ) concentrated on board age and found a negative impact on enforcement actions in China. This link was weakened by CEO-board directional age difference as moderating variable.

3.2.2 Audit committees

Audit committee independence Few studies have included independence of audit committee members in their research design. Two papers indicated a negative impact of independent members on restatements (Lary and Taylor 2012 ), and enforcement activities (Romano and Guerrini 2012 ). Another two studies could not find any significant impact on fraud (Khoufi and Khoufi 2018 ; Marzuki et al. 2019 ). Tan and Young ( 2015 ) compared “little r” restatements and big ones and found that board independence leads to more little financial restatements.

Audit committee expertise Most included studies on audit committees rely on the expertise of its members, especially on accounting or financial expertise. Das et al. ( 2020 ) found a negative link between accounting expertise on the audit committee and restatements. Cohen et al. ( 2014 ) documented that the combination of accounting and industry expertise leads to lower restatements in comparison to single accounting expertise on the audit committee. Lary and Taylor ( 2012 ) also found a negative impact of combined financial and industry expertise on restatements. Financial expertise (Khoufi and Khoufi 2018 ) and audit committee effectiveness (Razali and Arshad 2014 ) are also related to fewer fraud events. In contrast to this, Albrecht et al. ( 2018 ) stressed an increased influence of accounting expertise on restatements, moderated by excess compensation and earnings management. According to Lisic et al. ( 2019 ), the positive link between accounting expertise and restatements is moderated by adverse internal control audit opinions. Verriest et al. ( 2013 ) documented a positive impact of audit committee effectiveness on restatements. However, prior studies also stressed insignificant relationships between financial expertise and restatements (Hasnan et al. 2020 ), financial expertise and fraud (Marzuki et al. 2019 ), independent financial experts and enforcement actions (Inya et al. 2018 ), and supervisory expertise and restatements (Cohen et al. 2014 ). In contrast to the aforementioned studies, Ashraf et al. ( 2020 ), in a recent study, analyzed the impact of digital expertise on the audit committee on material restatements and found a negative relationship. In view of the great challenges of digital transformation and their huge impact on accounting practice, this kind of expertise will be mainly relevant in the future. With regard to gender diversity, Oradi and Izadi ( 2020 ) documented a negative impact on restatements, moderated by independent female financial experts on the audit committee. Analyzing audit committee cultural diversity, Felix et al. ( 2021 ) found a negative impact on restatements. This link was more pronounced by firms operating in complex environments and CEO power. Pathak et al. ( 2021 ) separated between relations- and task-oriented on the one hand and between fraud-related and error-related restatements on the other hand. Relations-oriented diversity leads to lower fraud-related restatements while task-oriented diversity and error-related restatements are negatively related.

Audit committee networks In line with included studies on the board network, we identify some researchers who concentrated on audit committee networks. Audit committee members who are connected with firms that disclosed a restatement within the prior three years or with material internal control weaknesses cause lower restatements (Cheng et al. 2019 ). Similar links can be stated for audit committee connectedness through director networks (Omer et al. 2020 ). In contrast to this, co-opted audit committees (Cassell et al. 2018 ) and independent audit committee multiple-directorships (Sharma and Iselin 2012 , based on post SOX-periods) are connected with increased restatements.

Audit committee size, tenure and meeting frequency Gao and Huang ( 2018 ) analyzed audit committees with an odd number of directors and found that the negative effect on restatements was moderated by audit committee members with heterogeneous options, less equity ownership, smaller size, and entrenched management. With regard to tenure-diverse audit committees, Li and Wahid ( 2018 ) also documented a negative impact on restatements. However, audit committee diligence (Lary and Taylor 2012 ) and meeting frequency (Marzuki et al. 2019 ) were not related to restatements and fraud. Jia et al. ( 2009 ) analyzed the Chinese two-tier system and found a positive impact of supervisory board size and meetings on enforcement actions.

Audit committee presence Audit committee presence (Yang et al. 2017 ; Romano and Guerrini 2012 ) did not influence enforcement actions.

3.2.3 Internal audit function

In line with the audit committee, the internal audit function represents a key monitoring institution within the firm in order to prevent firms’ financial misconduct. Ege ( 2015 ) found that the quality of the internal audit function decreases fraud or other intentional misconduct actions. Moreover, Zeng et al. ( 2021 ) documented that internal audit executive’s supervisory ability leads to lower fraud.

3.2.4 Board compensation

Two studies reported a negative link between executive compensation (Hasnan and Hussain 2020), pay disparities (Zhang et al. 2018 ), and restatements. Zhang et al. ( 2018 ) also stressed a moderator effect of state ownership, CEO turnover, and internal incoming CEOs. Armstrong et al. ( 2013 ) reported that ‘vega’ is positively related to both restatements and enforcement actions. According to Hass et al. ( 2016 ), managers’ pay to performance sensitivity from stockholdings increase enforcement actions. However, some researchers indicated an insignificant impact of board compensation on financial misconduct, based on managerial ownership (Tan et al. 2017 ), and stock ownership by supervisory boards (Yang et al. 2017 ). Few studies also included clawback provisions as recent opportunity of incentive-based management compensation systems. Firm-initiated clawback provisions (Chan et al. 2012 ; Fung et al. 2015 ), and clawback provision strength (Erkens et al. 2018 ) reduce restatements and fraud events. Fung et al. ( 2015 ) also reported that the negative link was weakened by insider sales.

3.3 Individual level

3.3.1 ceo/cfo expertise.

In line with board (audit committee) composition and board compensation, an increased number of studies included individual characteristics of top management team members with a clear focus on the CEO. CEO expertise represents one of the most important corporate governance variables in this context with various individual proxies. CEOs as ex-military members lead to lower enforcement actions, moderated by CEO non-duality model and board independence (Koch-Bayram and Wernicke 2018 ). Huang et al. ( 2012 ) also found that CEO age reduces enforcement actions. In contrast to this, some researchers stressed a positive impact of executive expertise on firm’s financial misconduct. CEO tenure increases misconduct, weakened by large and independent boards (Altunbas et al. 2018 ). CEO and CFO outside directorships and network ties to auditors lead to higher restatements, moderated by network on the local level (Yu et al. 2020 ). Two studies also found a negative impact of CFO gender on fraud events in China (Liao et al. 2019 ; Luo et al. 2020 ). In more detail, Liao et al. ( 2019 ) stated that this link is moderated by gender mixed boards and less powerful CEO and CFO directorships. According to Luo et al. ( 2020 ), the link was moderated by the level of education and external job opportunities.

3.3.2 CEO/CFO networks

Wu et al. ( 2016 ) reported that CEO and/or chairman political connections are linked with lower restatements. This connection was more pronounced in non-state owned firms and weak legal enforcement environment. Moreover, CEO employment, education, and other social network connections also reduce restatements (Bhandari et al. 2018 ). Bedard et al. ( 2014 ) stressed a negative impact of CFO inside directorship on restatements. In contrast to this, according to Khanna et al. ( 2015 ), CEO connections with top four non-CEO executives and directors through their appointment decisions are linked with increased restatements.

3.3.3 CEO power and duality

Two studies documented a positive influence of CEO power indices on restatements (Lisic et al. 2016 ). Lisic et al. ( 2016 ) also stated that this relationship is moderated by internal control weaknesses. CEO duality represents one of the most important proxies of CEO power. Some researchers stressed a positive influence on fraud (Khoufi and Khoufi 2018 ) and enforcement actions (Yang et al. 2017 ). Other researchers reported an insignificant impact on enforcement actions (Inya et al. 2018 ; Romano and Guerrini 2012 ) and fraud events (Salleh and Othman 2016 ; Shan et al. 2013 ; Tan et al. 2017 ).

3.3.4 CEO/CFO compensation

Some studies stressed a negative relationship between CEO compensation and firms’ misconduct. Conyon and He ( 2016 ) reported a negative influence of CEO equity-based compensation on fraud. CEO in-the-money-value also reduces restatements, moderated by clawback provisions (Natarajan and Zheng 2019 ). He ( 2015 ) found that CEO inside debt holdings cause decreased restatements. Zhou et al. ( 2018 ) stressed that CEO and CFO (equity) compensation reduces enforcement actions, while this link is weakened by delisting pressure of the firm. In contrast to these studies, according to Bao et al. ( 2021 ), CEO pay ratio and restatements are positively linked, while CEO power strengthens and CEO ability weakens this relationship. Hogan and Jonas ( 2016 ) found that CEO and CFO equity proportion increases and difference in CEO and CFO pay structure decreases restatements. However, Ghafoor et al. ( 2019 ) reported an insignificant relationship between CEO equity compensation and enforcement activities.

3.3.5 CEO/CFO hubris, overconfidence and narcissism

MacManus ( 2018 ) included CEO hubris variables and stressed that self-importance and accomplishment increase restatements. There are also indications that both CEO narcissism (Rijsenbild and Commandeur 2013 ) and CFO narcissism (Ham et al. 2017 ) imply more misconducts. Moreover, CEO overconfidence increase restatements (Presley and Abbott 2013 ). According to Hobson et al. ( 2012 ), vocal markers of cognitive dissonance of CEOs during earnings conference calls lead to more restatements.

3.4 Firm level

3.4.1 ownership structure.

Institutional ownership and blockholdings With regard to blockholders, prior research did not find any impact on restatements (Baber et al., 2015 ) and fraud (Tan et al. 2017 ). Ownership concentration both increases (Yang et al. 2017 ) or decreases (Inya et al. 2018 ) enforcement actions. Dou et al. ( 2016 ) analyzed the nature of blockholders and stated that hedge funds and venture capitalists reduce restatements. While Inya et al. ( 2018 ) documented a negative link between institutional ownership and enforcement activities, Baber et al. ( 2015 ) found insignificant results. Relying on the nature of institutional investors, dedicated institutional ownership increases (Shi et al. 2017 ) or decreases (Ghafoor et al. 2019 ) enforcement actions. In contrast to most studies on that research topic, Hedge and Zhou ( 2019 ) assumed a non-linear relationship in their study on investor optimism regarding firm-specific attributes. When firm-level optimism is moderate, restatements increase, but it decreases by high optimism.

Foreign ownership Few researchers on Asian regimes included foreign ownership as an external corporate governance variable. Shan et al. ( 2013 found a negative impact on fraud events. However, also insignificant effects on enforcement actions do exist (Hasnan et al. 2013 ; Inya et al. 2018 ).

Family ownership Asian studies also relied on family ownership. Hasnan et al. ( 2013 ) stated that family ownership leads to fewer enforcement actions, while other studies reported insignificant impact on restatements (Sue et al. 2013 ) and enforcement activities (Ghafoor et al. 2019 ).

State ownership In line with foreign and family ownership, the integration of state ownership is only relevant in Asian studies. There are indications that state ownership reduce fraud events (Shan et al. 2013 ; Shi et al. 2020 ). Shi et al. ( 2020 ) also found that CEO political background moderates this relationship.

3.4.2 Monitoring by other stakeholders

Few studies addressed financial analysts and their impact on firms’ financial misconduct. Bradley et al. ( 2017 ) found that industry expertise and monitoring effectiveness of financial analyst coverage reduce restatements. In contrast to this, according to Shi et al. ( 2017 ), analyst recommendations and enforcement actions are positively linked. If a forecast signal indicates a greater difference between analysts’ and auditors’ earnings expectations, restatements increase (Newton 2019 ). Same directions can be found if an analyst forecast signal indicates a greater likelihood of income increasing earnings management.

With regard to other stakeholder groups, labor union strength reduces restatements (Bryan 2017 ). According to Hopkins ( 2018 ), US circuit court ruling that made it easier for public corporations to defend against security class actions lead to increased restatements. This link was moderated by low stock return, ex ante risk of meritorious litigation and transient institutional ownership. While Yang et al. ( 2017 ) stated a positive link between regulatory pressure and enforcement actions, Zhang ( 2018 ) found a negative impact of public governance and enforcement actions. This relationship was strengthened by non-state ownership, weak legal environment, and poor local economies, and weakened by CEO age.

3.5 Institutional level

Our literature review only identifies legal enforcement as part of the institutional level of corporate governance. Most studies on characteristics of enforcement institutions relied on the US capital market and addressed the Public Company Accounting Oversight Board (PCAOB) as auditor oversight body. PCAOB Part II reports of annually inspected firms (Johnson et al. 2018 ), initial PCAOB inspections (Khurana et al. 2020 ), and clients of annually PCAOB inspected firms relative to clients of triennially inspected firms (Tanyi and Litt 2017 ) lead to reduced restatements. Khurana et al. ( 2020 ) also reported that this relationship is less for Big four audits and more effected for triennially inspected non-big four audit firms. In contrast to these studies, PCAOB inspection reports for triennially inspected auditors and restatements are positively related, when inspection reports are seriously deficient (Gunny and Zhang 2013 ). Two studies also concentrated on taxation (Lennox 2016 ; Li and Ma 2019 ). Li and Ma ( 2019 ) stated that tax enforcement efforts reduce general and tax-related restatements. Lennox ( 2016 ) did not find any impact of PCAOB’s restrictions on auditors’ tax services on restatements.

3.6 Main results

Our literature review indicates that most research on corporate governance and firms’ misconduct addressed the group and individual level of corporate governance. The firm and institutional level of corporate governance were of lower attraction yet and they mainly relied on ownership structure end legal enforcement. We also stress that moderator analyses and especially mediator analyses were rarely included yet. Most empirical research also neglect non-linear relationships between corporate governance, restatements and other misconduct variables. There are clear indications that expertise on the board, on audit committees and of the CEO/CFO increase financial reporting quality. Interestingly, all included studies on gender diversity on the board, audit committees and on female CFOs lead to reduced restatements, enforcement actions and fraud. While the amount of studies on individual psychological characteristics of the CEO and CFO is rather low, there are indications that CEO hubris, overconfidence and narcissism increase misconduct. However, most included research strengths show rather heterogeneous results and raise future questions about the real impact of corporate governance on firm’s financial misconduct. We identify major research gaps and limitations of prior studies which we will focus in the next section.

4 Discussion and future research recommendations

As the majority of our studies included in this literature review have addressed financial restatements and the group level of corporate governance, there is much room for recommendations for future research. First, we know relatively little about the influence of corporate governance on different kinds of restatements and other kinds of misconduct. We refer to Sievers and Sofilkanitsch ( 2019a , b ), who recommend to differentiate between severe (intentional) and less severe (unintentional) restatements. Few researchers explicitly differentiate between the nature of restatements, e.g., IT-related (Ashraf et al. 2020 ) or tax-related restatements (Lennox 2016 ; Li and Ma, 2019 ). However, the recognition of multiple misconduct variables in prior research models is very rare (e.g., Armstrong et al. 2013 ). In view of the heterogeneous results of prior research, validity of included misconduct proxies should be increased. An interesting question relates to the development of fraud probability scores before and after financial restatements. The relationship between earnings quality and restatements before and after the restatement events should be further analyzed. Changes in the F-score (Dechow et al. 2011 ) and the M-score (Beneish 1999 ) should be included as moderator or mediator variables in future archival research. Restatements can be used as a proxy for both disclosures of prior reporting failure (restatement announcement) and misreporting (restated periods). Restatement type is also differently used in prior archival research (e.g., annual vs. quarterly, severe vs. less severe). We also note that other firm’s financial misconduct proxies are rarely used. We know relatively little about the relationship between corporate governance and fraud events in archival research. As fraud events are mainly lower in comparison to restatement cases, researchers focused on restatements and related databases (Karpoff et al. 2017 ).

Our methodological recommendations also relate to corporate governance-related determinants. While there is an increased amount of studies which analyze the impact of the board of directors on firms’ financial misconduct, we know very little about non-shareholding stakeholder pressure on firm’s financial misconduct. In comparison to ownership structure, prior archival research on the firm and institutional level just rely on financial analysts and enforcement institutions. However, other stakeholder groups also punish illegal financial reporting behavior of firms (e.g., media pressure). Customers may call for a boycott for unethical products and services, suppliers and business partner may change to other firms, and employees may leave the fraud firms. Thus, we like to encourage future researchers to include new innovative proxies, also related to hand-collected data selection, in order to complement our picture of external (sustainable) corporate governance as a powerful monitoring mechanism.

While prior research has also included external auditor variables as main determinants of firms’ financial misconduct, especially based on financial restatements (Hogan et al. 2008 ; Trompeter et al. 2014 ), we know very little about the interaction between external auditors and corporate governance mechanisms. External auditors mainly support the audit committee, leading to a strong cooperation between both parties. We thus recommend to connect board composition variables, e.g., independence and expertise of audit committee members, and measures of audit quality, e.g., industry expertise, audit firm size, and auditor independence proxies, and their contribution to firm’s financial misconduct. It can be assumed that audit committee effectiveness and external audit quality may be classified as complementary mechanisms to reduce financial restatements and other kinds of misreporting. In line with board composition, we know very little about the interdependencies between auditors and ownership structure on this research topic. Ownership structure, e.g., institutional ownership, may have a strong impact on both auditor characteristics and managers’ incentives to financial misconduct. Our recommendations are not only restricted on corporate governance, but are also related to country-related governance. We encourage future researchers to conduct cross-country studies and include country effects, e.g., strength of shareholder rights, enforcement strength or cultural aspects. Culture has a main impact of managers’ motivations to conduct fraud and related negative events.

5 Conclusion

This study addresses a systematic review of archival research on the impact of corporate governance on firms’ financial misconduct. Our research is based on the famous fraud triangle by Cressey ( 1953 ) and an agency-theoretical framework. Agency theory assumes that corporate governance as major monitoring tools will detect and prevent firms’ financial misconduct as corporate governance will decrease information asymmetries. During the last decades, several serious cases of top management fraud have reduced stakeholder trust in financial reporting. The Enron scandal on the US-American capital market or the insolvency of the former Wirecard group company in Germany in 2020 should be stressed in this context. Recently, (inter)national standard setters discuss potential corporate governance regulations in order to decrease the probability of firms’ financial misconduct (Habib et al. 2020 ), e.g., based on compliance management and whistleblowing systems. Various corporate governance items, e.g., executive and non-executive directors within the board, external auditors, shareholders, enforcement institutions, are included in this discussion.

In line with prior literature, we clearly separate between four levels of corporate governance (group, individual, firm, and institutional level) and analyze their contribution to firms’ financial misconduct in prior archival settings. In more detail, we differentiate between board composition, compensation, audit committees and internal audit function as group level of corporate governance. CEO and/or CFO characteristics represent the individual level of corporate governance. We include ownership structure and monitoring by other stakeholders as firm level of corporate governance. Legal enforcement represents the key proxy of institutional level of corporate governance. We only include post-SOX studies in view of the massive impact of the corporate governance regulations in the US-American setting as dominant regime in our literature review. The external auditor was excluded in this literature review in view of the massive research activity on this topic and prior specific literature reviews (e.g., Hogan et al. 2008 ; Trompeter et al. 2014 ). We assume that corporate governance as monitoring mechanisms will lead to lower firms’ financial misconduct in line with agency theory as a proper corporate governance will lower information asymmetries between management and shareholders and support financial reporting quality. Most of our studies included in this literature review use financial restatements as dependent variable due to methodological reasons. While we also include enforcement actions and fraud events as misconduct proxies, we exclude earnings management. We follow the assumption that earnings management is in line with respective accounting regulations and standards while firms’ financial misconduct is connected with violations of the law.

Our review of 98 archival studies indicates that many studies on corporate governance variables find inconclusive results on firms’ financial misconduct. But there are indications that gender diversity on the board, on audit committees, and female CEOs decreases firms’ financial misconduct. However, we know very little about the impact of non-shareholding stakeholders on misconduct. We also give useful recommendations for future archival research on the link between corporate governance and firms’ financial misconduct. More specifically, we encourage future researchers to increase the validity of research designs. Restatement events should be better analyzed with regard to their nature. Future studies should include a mixture of different misconduct proxies and evaluate, whether other factors moderate or mediate the link between corporate governance and restatements. Methodological concerns arise in the low attraction in moderator and especially mediator analysis. In more detail, board composition, e.g., audit committees, and ownership structure have major interdependencies with external audit quality to detect and prevent financial misconduct of the firm.

This study has main implications for regulatory bodies and business practice. Regulators should be aware of the possibilities and limitations of corporate governance variables on firms’ misconduct, especially on fraud events. Recent discussions must consider, whether monitoring or incentive-based elements are crucial to increase ethical management behavior of listed corporations. Non-executives should implement adequate management compensation systems to strengthen financial reporting quality and decrease intentional misreporting. Stricter legal rules cannot prevent firms’ financial scandals if “tone at the top” is unethical and leadership style of executive directors is questionable. Firms’ financial misconduct should be more linked to corporate social responsibility (CSR) and compliance management systems in the future.

Availability of data and material

In our literature review, we exclude studies with a focus on earnings management as major proxy of financial reporting quality. Earnings management includes legal options to influence the financial statement and other financial reporting information from a quantitative and/or qualitative way. In contrast to this, our interpretation of firms’ financial misconduct solely deals with violations of recent (inter)national accounting standards and related regulations.

The fraud triangle was later extended by the fraud diamond by Wolfe and Hermanson ( 2004 ), who added one new component (capability). Moreover, the fraud pentagon by Marks ( 2012 ) was classified by another component to the fraud theory (arrogance).

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Velte, P. The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research. Manag Rev Q 73 , 353–411 (2023). https://doi.org/10.1007/s11301-021-00244-7

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Corporate Governance Research Paper Topics

This guide provides a comprehensive list of corporate governance research paper topics divided into 10 categories, expert advice on choosing a relevant and feasible topic, and tips on how to write a successful corporate governance research paper. Corporate governance is a critical aspect of modern business that has a significant impact on the success of organizations. As a result, students who study corporate governance are often assigned to write research papers that explore various aspects of the topic. In addition, iResearchNet offers custom writing services that provide expert degree-holding writers, customized solutions, and timely delivery. By using this guide and iResearchNet’s writing services, students can ensure that their corporate governance research papers meet the highest academic standards.

Corporate Governance Research

Corporate governance is a critical aspect of modern business that encompasses the practices, processes, and systems by which organizations are directed, controlled, and managed. As a result, students who study corporate governance are often assigned to write research papers that explore various aspects of the topic, ranging from board structures and executive compensation to shareholder activism and stakeholder engagement.

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In this guide, we provide a comprehensive list of corporate governance research paper topics divided into 10 categories, expert advice on how to choose a relevant and feasible topic, and tips on how to write a successful corporate governance research paper. In addition, we offer custom writing services through iResearchNet that provide expert degree-holding writers, customized solutions, and timely delivery.

By using this guide and iResearchNet’s writing services, students can ensure that their corporate governance research papers are well-researched, well-written, and meet the highest academic standards.

100 Corporate Governance Research Paper Topics

Corporate governance is a broad and complex topic that encompasses a wide range of issues and challenges facing modern organizations. To help students choose a relevant and feasible corporate governance research paper topic, we have divided our comprehensive list of topics into 10 categories, each with 10 topics.

Board of Directors

• Board independence and effectiveness
• Board diversity and gender equality
• CEO duality and separation of roles
• Board composition and characteristics
• Board oversight and accountability
• Board nominations and elections
• Board leadership and culture
• Board committees and responsibilities
• Board evaluation and performance
• Board compensation and incentives

Executive Compensation

• Executive pay and performance
• Executive pay and firm performance
• Pay-for-performance and pay-for-skill
• CEO pay ratios and pay equity
• Stock options and equity-based compensation
• Executive severance and golden parachutes
• Executive perquisites and benefits
• Executive retirement and pensions
• Say-on-pay and shareholder activism
• Institutional investors and executive pay

Shareholder Activism

• Shareholder rights and activism
• Shareholder proposals and proxy access
• Shareholder engagement and communication
• Shareholder activism and corporate social responsibility
• Institutional investors and shareholder activism
• Hedge funds and shareholder activism
• Shareholder activism and executive compensation
• Shareholder activism and board independence
• Shareholder activism and corporate governance reforms
• Shareholder activism and CEO turnover

Stakeholder Engagement

• Stakeholder identification and analysis
• Stakeholder mapping and prioritization
• Stakeholder communication and dialogue
• Stakeholder participation and empowerment
• Stakeholder consultation and feedback
• Stakeholder engagement and corporate social responsibility
• Stakeholder engagement and sustainability reporting
• Stakeholder engagement and risk management
• Stakeholder engagement and corporate reputation
• Stakeholder engagement and value creation

Corporate Culture and Ethics

• Corporate values and ethics
• Ethical leadership and decision-making
• Corporate social responsibility and sustainability
• Business ethics and compliance
• Corporate citizenship and philanthropy
• Corporate culture and values alignment
• Corporate culture and employee behavior
• Corporate culture and organizational performance
• Corporate culture and innovation
• Corporate culture and risk management

Board-Shareholder Relations

• Board-shareholder communication and engagement
• Board-shareholder conflict resolution
• Board-shareholder cooperation and collaboration
• Board-shareholder activism and response
• Board-shareholder rights and responsibilities
• Board-shareholder agreements and charters
• Board-shareholder engagement and corporate social responsibility
• Board-shareholder relations and institutional investors
• Board-shareholder relations and minority shareholders
• Board-shareholder relations and corporate governance reforms

Regulatory and Legal Environment

• Corporate governance regulations and compliance
• Corporate governance laws and policies
• Corporate governance codes and standards
• Corporate governance enforcement and penalties
• Corporate governance and public policy
• Corporate governance and the role of regulators
• Corporate governance and antitrust laws
• Corporate governance and securities laws
• Corporate governance and data privacy laws
• Corporate governance and intellectual property laws

Risk Management and Disclosure

• Enterprise risk management and oversight
• Risk management and strategic planning
• Risk management and financial reporting
• Risk management and sustainability reporting
• Risk management and cybersecurity
• Risk management and climate change
• Risk management and supply chain management
• Risk management and crisis management
• Risk management and stakeholder engagement
• Risk management and disclosure requirements

International Corporate Governance

• Cross-border mergers and acquisitions and corporate governance
• Corporate governance and foreign direct investment
• Corporate governance and multinational corporations
• Corporate governance and global supply chains
• Corporate governance and global financial markets
• Corporate governance and emerging markets
• Corporate governance and corruption
• Corporate governance and cultural diversity
• Corporate governance and the United Nations Sustainable Development Goals
• Corporate governance and global challenges

Corporate Governance Reform

• Corporate governance failures and scandals
• Corporate governance reforms and their impact
• Corporate governance and shareholder activism
• Corporate governance and executive compensation reform
• Corporate governance and board independence reform
• Corporate governance and stakeholder engagement reform
• Corporate governance and diversity and inclusion reform
• Corporate governance and sustainability reform
• Corporate governance and regulatory reform
• Corporate governance and future trends

By organizing the corporate governance research paper topics into categories, students can easily identify areas of interest and develop research questions that align with their academic goals and interests. The categories cover a wide range of issues and challenges facing modern organizations, from board structures and executive compensation to stakeholder engagement and international corporate governance.

Choosing a Topic in Corporate Governance

Choosing a relevant and feasible corporate governance research paper topic is critical for success in academia. The following are expert tips on how to choose a corporate governance research paper topic:

• Consider your interests : Choose a topic that you are interested in and passionate about. Your enthusiasm for the topic will help you stay motivated throughout the research and writing process.
• Identify a research gap : Choose a topic that fills a research gap or addresses a new research question. This will help you contribute new knowledge to the field and make a meaningful contribution to academic scholarship.
• Consult with your instructor : Discuss potential topics with your instructor and seek feedback on your ideas. Your instructor can help you refine your research question and suggest relevant literature and sources.
• Conduct a literature review : Conduct a literature review to identify gaps and areas of interest within the field. This will help you develop research questions and identify key concepts and themes.
• Consider feasibility : Choose a topic that is feasible given the time and resources available to you. Be realistic about your research scope and the data sources that are available to you.
• Stay current : Choose a topic that is current and relevant to the field. This will help you stay up-to-date on the latest trends and developments in corporate governance.
• Identify a manageable scope : Choose a topic that has a manageable scope. Narrow down your research question to a specific aspect of corporate governance that can be explored in-depth within the scope of a research paper.
• Brainstorm potential topics : Brainstorm a list of potential topics based on your interests, literature review, and discussions with your instructor. Evaluate each topic based on its relevance, feasibility, and potential impact.

By following these expert tips, students can choose a relevant and feasible corporate governance research paper topic that aligns with their academic interests and goals. In the next section, we provide tips on how to write a successful corporate governance research paper.

How to Write a Corporate Governance Research Paper

Writing a successful corporate governance research paper requires careful planning and attention to detail. The following are expert tips on how to write a corporate governance research paper:

• Develop a clear research question : Develop a clear and concise research question that addresses a gap or new research question within the field of corporate governance. The research question should be specific and focused to ensure a manageable scope for the research paper.
• Conduct a literature review : Conduct a comprehensive literature review to identify key concepts and themes within the field of corporate governance. This will help you develop a theoretical framework and provide a foundation for your research paper.
• Select appropriate research methods : Select appropriate research methods that align with your research question and objectives. This may include qualitative, quantitative, or mixed-methods research approaches.
• Collect and analyze data : Collect and analyze data using appropriate research methods. This may include conducting interviews, surveys, or analyzing financial data. Ensure that your data collection and analysis is rigorous and aligns with the research question and objectives.
• Develop a clear and structured outline : Develop a clear and structured outline for your research paper. This will help you organize your thoughts and ideas and ensure a logical flow of information.
• Write a clear and concise introduction : Write a clear and concise introduction that provides background information and context for the research question. The introduction should also clearly state the research question and objectives.
• Develop a comprehensive literature review : Develop a comprehensive literature review that provides a theoretical framework for the research question. The literature review should be organized thematically and include key concepts and themes within the field of corporate governance.
• Analyze and interpret findings : Analyze and interpret the findings of the research. Ensure that your analysis and interpretation aligns with the research question and objectives.
• Develop a clear and concise conclusion : Develop a clear and concise conclusion that summarizes the key findings of the research and provides implications for practice and future research.
• Ensure proper formatting and citation : Ensure that your research paper is properly formatted and cited. Follow the guidelines of the citation style required by your instructor, such as APA, MLA, or Chicago.

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Corporate governance and innovation: a theoretical review

European Journal of Management and Business Economics

ISSN : 2444-8494

Article publication date: 23 October 2018

Issue publication date: 3 October 2019

The purpose of this paper is to present a review of the literature on two lines of research, corporate governance and innovation, explaining how different internal corporate governance mechanisms may be determinants of business innovation.

Design/methodology/approach

It explores the theoretical background and the empirical evidence regarding the influence of both ownership structure and the board of directors on company innovation. Then, conclusions are drawn and possible future research lines are presented.

No consensus was observed regarding the relation between corporate governance and innovation, with both positive and negative arguments being found, and with empirical evidence not always pointing in the same direction. Thus, new studies trying to clarify this relationship are needed.

Originality/value

Over recent years, interest has grown in the influence of governance mechanisms on innovation decisions taken by the management. Innovation efforts and results depend on factors that are influenced by corporate governance, such as ownership structure or the functioning of the board of directors. Thus, the paper shows an updated state of the art in this field proposing future lines for empirical research.

• Corporate governance
• Ownership structure
• Board of directors

Asensio-López, D. , Cabeza-García, L. and González-Álvarez, N. (2019), "Corporate governance and innovation: a theoretical review", European Journal of Management and Business Economics , Vol. 28 No. 3, pp. 266-284. https://doi.org/10.1108/EJMBE-05-2018-0056

Emerald Publishing Limited

Copyright © 2018, Diego Asensio-López, Laura Cabeza-García and Nuria González-Álvarez

Published in European Journal of Management and Business Economics . Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

Introduction

Separation between ownership (shareholders) and control (management) and its relevance for company value and decisions makes it necessary to draw up management control mechanisms. This idea led to the appearance of the corporate governance concept, which has attracted great interest among academic researchers, especially as a result of certain financial scandals over recent years (Enron, Parmalat, WorldCom, etc.). According to Shleifer and Vishny (1997) , corporate governance can be understood as the set of mechanisms that align objectives and interests between the providers of finance and company managers so that the former have a degree of certainty against the risk they take by making their funds available to managers, and can try to avoid opportunistic behavior by the latter.

Governance mechanisms can be separated into internal ones (set up by the company itself) and external ones (linked to the different markets in which the company may be present). This study focuses on the former which are the most developed in Spain and have most often been linked to innovation. They include, on the one hand, ownership structure (degree of concentration and large shareholder identity) and, on the other, the board of directors and its functioning in association with certain characteristics (size, composition, etc.) such as the most important measures for overseeing the management ( Salas, 2002 ) and, as a result, for overseeing the decisions taken by the company regarding its performance and competitiveness.

In his two best-known books, Schumpeter (1934, 1942) claims that innovation is the main force for economic development. According to the Oslo Manual, the concept of innovation can be defined as “the introduction of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations” ( OECD, 2005 , p. 56). Most of the literature focuses on two methods for measuring innovation, the most common being to consider inputs (any efforts made by the company to be more competitive and more innovative, which are usually represented either by expenditure on Research and Development (R&D) as a percentage of the company’s total sales, or by the number of people involved in R&D activities as a percentage of the company’s total employees) and outputs (the result of the innovative activity measured as the number of patents registered or in process of registration by the company).

Although most of the prior studies have tried to analyze the influence of governance on company performance and value, others (some recently) have shown that corporate governance is one of the main determinants for innovation and technological change ( Tylecote and Visintin, 2007 ). Over recent years, interest has grown in the influence of governance mechanisms on innovation decisions taken by the management ( Tribo et al. , 2007 ; Wu, 2008 ; Latham and Braun, 2009 ; Belloc, 2012 [1] ; Block, 2012 ; Balsmeier et al. , 2014 ; Zhang et al. , 2014 ; Tsao et al. , 2015 ). Amongst others, these authors argue that innovation efforts and results depend on factors that are influenced by corporate governance, such as ownership structure, shareholder identity or the functioning of the board of directors.

In this context, the purpose of this study is to link these two fields of research by reviewing the literature (from the late 1980s until today, and including both Spanish and international journals). The ultimate aim is to find out the state of the art in this field and thus to propose future lines for empirical research. The paper is therefore organized as follows: second and third sections present the relation between ownership structure and the board of directors and business innovation, respectively, adding theory on the influence of one on the other and providing empirical evidence to corroborate the relations described. Finally, the fourth section draws conclusions from the review, points out some limitations and suggests possible lines for future research.

Ownership structure and innovation

Ownership structure is one of the main mechanisms for corporate governance ( Shleifer and Vishny, 1997 ; La Porta et al. , 1998, 2000 ) so we review its influence on innovation, distinguishing between two aspects – ownership concentration, and the identity of the main owners [2] .

Ownership concentration and innovation

The prior literature includes arguments supporting both a positive and a negative relation between ownership concentration and R&D activities [3] . An initial argument on a negative relation lies in greater risk aversion. Ownership concentration and combined ownership and management may reduce the pressure that external investors or other supervisors exert on managers in their control of financial statements, information transparency and strategic renewal ( Carney, 2005 ). Agency theory ( Jensen and Meckling, 1976 ; Fama and Jensen, 1983 ) claims that owners or managers become more risk averse as their share in the company capital grows ( Beatty and Zajac, 1994 ; Denis et al. , 1997 ). This is because it is often difficult for them to diversify their risk so they become more conservative and carry out fewer R&D activities. In addition, concentrated ownership can lead not only to risk aversion but also to a lack of willingness to participate in activities for strategic change, such as innovation, because this involves short-term expenditure on R&D while any possible returns would only appear in the long term ( Hill and Snell, 1988 ; George et al. , 2005 ).

Another argument that may explain the negative relation between ownership concentration and innovation is the conflict between minority and large shareholders which results from limited legal shareholder protection in some countries ( Young et al. , 2008 ). High concentration may allow owners to use the company’s resources to maximize their own private benefits ( Su et al. , 2007 ), at the expense of the minority shareholders, instead of performing profitable activities, such as innovation, that would benefit everyone.

In line with the above arguments, there are studies that support this negative relation for Italy ( Battaggion and Tajoli, 2000 ), Spain ( Ortega-Argilés et al. , 2005 ; Ortega-Argilés and Moreno, 2009 ), Switzerland ( Brunninge et al. , 2007 ) and Germany ( Czarnitzki and Kraft, 2009 ). Outside Europe, other results also back this idea for Canada ( Di Vito et al. , 2008 ) and China ( Chang et al. , 2010 ; Zeng and Lin, 2011 ). Moreover, as suggested by Ortega-Argilés and Moreno (2009) , not only ownership concentration but also the inclusion of owners in management tasks and decision-making could lead to a drop in risky projects because they are less specialized in the patent system and have fewer technical skills.

On the other hand, a positive relation between ownership concentration and innovation is suggested because large owners are likely to be more concerned about the market value of the company and more motivated to invest in projects that are expected to generate value ( Baysinger et al. , 1991 ; Lee, 2005 ; Belloc, 2012 ). When ownership is concentrated in just a few hands, it is likely to prevent incorrect use of investment funds by the management ( Ortega-Argilés et al. , 2006 ). A small number of large shareholders may prefer to make long-term investments in R&D in order to increase company stability instead of focusing on their own profits. Some empirical studies show that ownership concentration has a positive effect on innovation ( Hill and Snell, 1988 ; Baysinger et al. , 1991 ; Lacetera, 2001 , for the USA; Di Vito et al. , 2008 for Canada; Munari et al. , 2010 , for Europe).

There have also been some studies supporting a two-way relation between ownership concentration and innovation, depending on the countries studied. For example, Lee and O’Neill (2003) conclude that an increase in ownership concentration is positively related to R&D expenditure in US companies, but not in Japanese companies. On the other hand, in a study on companies in France, Germany, Italy (all countries with high ownership concentration) and the USA and UK (where ownership is more dispersed), Hall and Oriani (2006) found that in France, Germany, UK and US investment in R&D is positively related to market value, and that in Italy and France only companies with no large shareholders were positively valued in the market for their R&D expenditure.

In addition, some empirical studies show that the relation between concentration and innovation might not be linear. Denison and Mishra (1995) argue that large shareholders have a vision that strengthens long-term success but, since they have a large share in the capital they are more risk averse, which causes a negative effect on R&D investment. So, if the risk aversion of large shareholders predominates, ownership concentration will have a negative effect on innovation but if a long-term vision predominates, the effect will be positive. Shapiro et al. (2015) explain this non-linear relation between the two variables by the hypotheses of alignment of interests and of entrenchment or opportunism, which results in an inverted U-shape relation, as found by Chen et al. (2014) . Alignment of incentives may mean that at low levels of concentration, shareholders are more concerned about decisions that will create value in the company, such as innovation. Concentrated ownership dominated by large shareholders, on the other hand, may encourage the latter to divert resources at the cost of minority shareholders, especially when the latter’s rights are not well protected ( La Porta et al. , 2000 ; Hess et al. , 2010 ), and this self-interested behavior may have a negative effect on R&D expenditure ( La Porta et al. , 2000 ).

Cho (1998) , however, states that the relation between corporate ownership and innovation activity may work both ways. He argues that ownership structure affects R&D expenditure, which affects company value, which in turn affects ownership structure. Other studies do not analyze a direct relation between ownership concentration and innovation but consider that the former may moderate another existing relation. For example, Tsao and Chen (2012) find that cash flow control by owners positively moderates the relation between internationalization and innovation in the company, while the entrenchment effect that arises from the diverging interests between control and cash flow rights may negatively moderate this relation. Other studies propose that R&D expenditure may mediate in the relation between ownership concentration and business performance ( Zhang et al. , 2014 ).

In summary, regarding ownership concentration, although the empirical evidence is not conclusive, from a theoretical point of view and in line with what has been found in other prior studies, it seems reasonable to expect an inverted U relation between concentration and innovation. For low levels of ownership, what predominates is the incentive alignment effect and the fact that innovation may help create value. On the other hand, at greater levels of concentration and especially in countries with less protection for minority shareholders, risk aversion and the incentive to obtain private benefits from control may result in a negative relation. Moreover, the fact that the causality in the relation is not clear makes it necessary to control for endogeneity in any estimation.

Large shareholder identity

We describe below the different identities of large shareholders (institutional investors, bank owners, state ownership, non-financial entities, foreign investors, individual investors, family ownership and manager ownership) and how they relate to innovation.

Institutional investors

Institutional investors may lead to a lower level of innovation, because they tend to be short-sighted, looking only for short-term profits. They value these more than long-term profits ( Kochhar and David, 1996 ) because access to specific company information is not readily available to them, which in turn makes it difficult for them to evaluate the company’s value in the long term ( Porter, 1992 ). They may prefer to benefit only from share price rises and drops even if such changes are only short-lived ( Loescher, 1984 ). A consequence of this preference for investing in the short term is that managers may also set this time line when taking decisions ( Kochhar and David, 1996 ). Also, since managers want to minimize threats of acquisition, which would leave them without a job ( Walsh, 1989 ), they may have incentives to reduce the risk of long-term investments in, for example, innovation activities ( Hayes and Abernathy, 1980 ). Institutional ownership may also pressure managers to report profits in the short term, especially in loss-making companies ( Graves and Waddock, 1990 ). This reduces their interest in entrepreneurial activities, especially R&D investment and the development of new internal products, which involve a high level of risk and only bring returns in the long term ( Hill et al. , 1988 ).

In line with these ideas, Graves (1988) showed a negative relation between institutional ownership and R&D expenditure. David et al. (2001) argued that institutional investors are not positively associated with R&D inputs, and Kochhar and David (1996) suggest that institutional ownership is negatively associated with the new product ratio, even though the relation is not statistically significant.

There may also be a positive relation between the two variables. Because of their wealth, institutional investors can obtain economies of scale in investment projects, so they have more market knowledge than individual investors ( Black, 1992 ). They may therefore have the necessary incentives for carefully evaluating the possible benefits of long-term investments rather than short-term gains from price fluctuations ( Kochhar and David, 1996 ). And, since it is not easy for them to diversify their investment in the short term, they might encourage managers to make long-term investments ( Kochhar and David, 1996 ). Another argument in support of a positive relation was made by Aghion et al. (2009) . Institutional owners have greater incentives and supervisory capacities than other owners. This increased oversight protects managers from the consequences of a failed R&D project which might affect their reputation so institutional ownership can be said to reassure managers about their future job stability. In line with the above arguments Baysinger et al. (1991) and Hansen and Hill (1991) find that institutional investors have a positive effect on R&D expenditure by companies. Similarly, Aghion et al. (2009) for the USA and Choi et al. (2011) for China conclude that the presence of institutional ownership increases the number of registered patents.

Bank ownership

Banking entities maintain trade relations with the companies in which they invest, often providing loans and credits ( Kroszner and Strahan, 2001 ). This exposes banks to uncertainty on the returns on R&D investments. In addition, the presence of banks encourages companies to increase their capital by borrowing ( Petersen and Rajan, 1994 ). The greater the debt, the greater the risk and the greater the importance of distortions generated by debt in investment decisions. One of them is short-term investment ( Grinblatt and Titman, 1998 ), which may hold back investments in R&D which are mainly for the long term ( Hoskisson et al. , 1993 ).

However, the empirical evidence is not conclusive because some studies support a negative relation ( Tribo et al. , 2007 ; Xiao and Zhao, 2012 ), some find the opposite ( Sherman et al. , 1998 ; Miozzo and Dewick, 2002 ; Lee, 2005 ) and some find no significant relation ( Kochhar and David, 1996 ).

State ownership

A positive relation might be expected between state ownership and innovation. Governments have an important role to play in developing innovation because they provide resources for creating new technologies ( Amsden, 1992 ; Haggard, 1994 ). Some authors argue that they have positive effects on company performance in both advanced countries ( Kole and Mulherin, 1997 ) and countries that are in an economic transition ( Sun et al. , 2002 ). State-run companies have significant incentives and access to important infrastructure that facilitates innovation ( Chang et al. , 2006 ). In some studies, however, the influence of state ownership on performance and business decisions is found to be negative (e.g. Vickers and Yarrow, 1991 ; Dewenter and Malatesta, 2001 ). A double agency relationship or the existence of political objectives going beyond profit maximization are possible explanations.

The empirical evidence, therefore, is not conclusive. Miozzo and Dewick (2002) conclude that, in the case of Denmark, the government plays an important role in stimulating innovative projects through collaboration. For China, Chen et al. (2014) , Choi et al. (2011) and Zeng and Lin (2011) maintain that the State is positively related to innovation outputs or inputs. However, in an international study, Xiao and Zhao (2012) conclude that state-controlled banks have a negative effect on business innovation, especially in small companies. But neither Choi et al. (2012) nor Munari et al. (2010) find a significant relation.

Non-financial entities

Unlike banks, non-financial companies rarely have credit relations with the companies they control ( Kroszner and Strahan, 2001 ; La Porta et al. , 2006 ). This reduces the degree of risk in debt, avoids investment inefficiencies such as the above-mentioned short-term investment bias, and encourages investment in R&D. Also, non-financial companies are more likely to recognize the importance of R&D in market success. Reciprocal trade relations and synergies between the company and its owner can be expected to encourage investment in R&D ( Jaffe, 1986 ). By investing in R&D, controlled companies can improve their absorption capacity ( Cohen and Levinthal, 1990 ). Sometimes, owners invest strategically in R&D-intensive companies with the intention of delegating to them some of their own investments in R&D, which would thus become more efficient. Large companies invest in starting up others, give them incentives to invest in R&D and, if such new companies are then successful, the large companies include them in their own division to improve their own investments in R&D ( Gompers et al. , 2008 ). Tribo et al. (2007) corroborate these ideas for Spain because their results suggest that non-financial companies have a positive impact on R&D investments.

Foreign investors

Foreign partners provide companies with advanced techniques, knowledge and management resources in addition to funding. According to Choi et al. (2011) there are three reasons for a positive relation between foreign ownership and innovation. First, foreign investment by multinationals tends to focus on the domestic market for their main business. This requires a competitive technological advantage over other domestic companies ( Johanson and Vahlne, 1977 ; Chang, 1995 ) and the foreign companies are taken as the model for developing technological and innovation capacity. Second, foreign partners can help companies step up their R&D efforts by means of advanced transfer of technological resources. Finally, foreign investors also encourage their domestic partners to invest in technological development by using their own shares ( Chang et al. , 2006 ).

The empirical evidence corroborates the positive relation in the European context ( Love et al. , 1996 for Scotland, Kostyuk, 2005 for Ukraine), in China ( Chen et al. , 2014 ; Choi et al. , 2011, 2012 ) and Korea ( Lee, 2012 ). Similarly, for the USA Francis and Smith (1995) argue that foreign ownership reports a significantly larger number of patents granted than companies with dispersed ownership.

Individual investors

There can be both a positive and a negative relation between individual investors and R&D. On the one hand, supervision is enhanced when the main individual shareholders are present because they offer more points of view. Also, the stakes of large individual shareholders represent a significant proportion of their wealth so they have incentives to supervise and this may have a positive effect on R&D. On the other hand, agreements on long-term investment projects are more difficult to reach when there are numerous large investors ( Hoskisson et al. , 2002 ). The empirical study performed by Tribo et al. (2007) for Spain did not find a significant relation, whereas Baysinger et al. (1991) conclude that the positive effect of ownership concentration on R&D expenditure can be attributed more to the impact of institutional rather than individual investors.

Family ownership

Families have better access to information and focus more on longer time frames than non-family shareholders ( Anderson and Reeb, 2003 ; Brenes et al. , 2011 ). Family owners have an information advantage over minority shareholders and are better able to understand the value and risks involved in R&D projects. With their longer-term horizon, families see their company as an asset to be passed on to their descendants rather than as wealth to be consumed during their lifetime. Also, this longer time horizon allows family owners to tolerate an increased deficit if it encourages the managers and directors to participate in R&D investment strategies. On the other hand, family owners tend to be large shareholders whose wealth is tied up in their companies, so it is difficult for them to diversify their risks ( Tsao et al. , 2015 ). So, since R&D projects are intrinsically risky, family enterprises may prefer to invest less in R&D ( Anderson et al. , 2012 ).

The empirical evidence is not conclusive. For the USA, Francis and Smith (1995) reach the conclusion that family-owned enterprises hold significantly more patents than companies with multiple owners. For Korea, Yoo and Sung (2015) find that family control is positively related to R&D intensity, especially when there are few opportunities for growth. Along the same line, for Taiwan Tsao et al. (2015) conclude that family companies invest more in R&D. In European countries, Munari et al. (2010) argue that family ownership is negatively and significantly related to R&D investment. Similarly, for China, Choi et al. (2011) suggest that family ownership leads to a smaller number of registered patents, and Chrisman and Patel (2012) find that families generally invest less in R&D than non-family companies adding that, when performance is worse than expected, their views change and they increase their investments in R&D more than non-family companies.

Other studies suggest that the effect is different depending on whether the company is in the hands of the founder or of the descendants. For the USA, Block (2012) finds that founder-led companies have a positive effect on both R&D expenditure intensity and productivity, but that when they are in the hands of descendants, the effect changes to neutral or even negative. In their analysis of Korean companies, Choi et al. (2015) find that the relation is positively moderated by growth in opportunities. Their results indicate that a family-run company generally invests less in R&D but, when performance drops below what was expected, prospects change to the extent that family-run companies increase their investments in R&D more than non-family companies. The relation is not the same for all companies, being weaker in large family-run business groups where family control is more secure.

Finally, family ownership may be a moderating variable for other relations. For example, Kim et al. (2008) find that family ownership has a positive moderating effect on the relation between financial slack and R&D investment, and Tsao et al. (2015) conclude that it positively moderates the relation between R&D investment and CEO remuneration.

Management ownership

Management ownership helps reduce agency problems between shareholders and managers and the fact that managers have greater voting power guarantees their job stability so also reduces their risk aversion ( Cho, 1992 ). When managers hold shares in the company they are more likely to take decisions that will maximize shareholder profit, such as R&D investment ( Hill and Snell, 1988 ; Latham and Braun, 2009 ).

However, the empirical evidence on the one hand suggests the relation may be both positive ( Hill and Snell, 1988 ; Francis and Smith, 1995 ) and negative. Latham and Braun (2009) argue that the relation between organizational decline and innovation is moderated by management ownership. That is, when managers face a loss of their wealth or job security, they cut back any risky actions, which leads to a drop in innovation activities. Greater ownership leads managers to adopt behavior that is more in line with the rigidity model, significantly holding back investment. However, in some cases, no statistically significant relation is found ( Lacetera, 2001 ; Choi et al. , 2012 ).

So, regarding the influence of the main shareholder’s identity on business innovation, it seems that, in line with the theory, a company is more likely to carry out innovation activities if the largest shareholder is a long-term institutional investor, a non-financial entity or a foreign investor. In companies run by a family or individuals, if they have sufficient resources or a situation in which they can afford to carry out risky activities (such as innovation) without placing their future at risk, innovation activity can be expected to be more intense. This is also the case if the company is under the control of its founder rather than descendants, in which case business performance is usually worse and there is greater conflict over decisions ( Blumentritt et al. , 2013 ). In the case of companies in which the State has a significant stake, the problems of State-Owned companies may predominate (such as a double agency relation, soft budgetary restrictions, distorted objectives, etc.), which may affect decisions to create value. Along these lines, some studies suggest that product and service innovation increases after privatization ( Antoncic and Hisrich, 2003 ). Finally, when managers hold a stake in the capital, they will align their interests with those of the owners, thus encouraging value-creating decisions on, for example, innovation.

Boards of directors and innovation

The board of directors provides a formal link between the owners and those in charge of the day-to-day running of the company, and is described as the top body for control decisions within corporate governance ( Fama and Jensen, 1983 ; Adams et al. , 2008 ). Although the literature, especially in the fields of finance and business management, shows that the board plays a crucial role in the relation between corporate governance and strategy, the evidence on the relation between the board and innovation by companies is limited ( Balsmeier et al. , 2014 ). As far as we know, Baysinger et al. (1991) were the first to analyze the link between certain board characteristics and innovation, and concluded that there is a positive link between the proportion of internal board members and R&D expenditure per employee. Since then, the literature has gradually shown how other board characteristics may also influence companies’ innovation activities. These include composition ( Baysinger et al. , 1991 ; Hoskisson et al. , 2002 ; Kor, 2006 ; Brunninge et al. , 2007 ; Balsmeier et al. , 2014 ), size ( Lacetera, 2001 ; Adams et al. , 2008 ; Driver and Guedes, 2012 ), directors’ educational level ( Escribá-Esteve et al. , 2009 ; Barroso et al. , 2011 ; Dalziel et al. , 2011 ), board meeting frequency ( Chen and Hsu, 2009 ; Wincent et al. , 2010 ) and CEO duality ( Lhuillery, 2011 ).

An essential aspect of boards is their composition. On the one hand, external directors can reconcile differences on the board, evaluate whether independent agendas fit in corporate routines and reduce potential agency conflicts ( Yoo and Sung, 2015 ). This type of director plays two important roles in a firm. First, their independence places them in a better position to supervise management ( Rosenstein and Wyatt, 1990 ; Peng, 2004 ; Brunninge et al. , 2007 ). Second, external directors, such as bankers or politicians, have different assets to offer or represent important interest groups ( Adams et al. , 2008 ).

This type of director also plays an essential role in the acquisition of specialist knowledge, as do their networks for speeding up knowledge transfer ( Westphal, 1999 ). Company expansion through external directors can help to attract funds and to improve its learning experience for innovation activities ( Fried et al. , 1998 ). So external directors can be expected to help promote strategies that will boost shareholder wealth, including R&D investments ( Kosnik, 1987, 1990 ). And when external directors work in close collaboration with companies, they can give not only new strategic guidelines but can also provide information and advice during a process of change because of their personal contacts linking the company with important elements in its environment ( Borch and Huse, 1993 ). They can be agents for the acquisition of resources ( Goodstein and Boeker, 1991 ; Kim and Kim, 2015 ) and can improve the organization’s reputation ( Hung, 1998 ; Johannisson and Huse, 2000 ), facilitating external conditions for change or innovation actions.

In line with the above arguments, Brunninge et al. (2007) and Shapiro et al. (2015) find that the presence of external directors has a positive effect on strategic changes, including innovation. Similarly, for Germany Balsmeier et al. (2014) find that external directors with experience who sit on the boards of technological companies have a positive and significant effect on applications for patents in the companies which they advise and supervise.

However, the monitoring and advice that can be expected from external directors is not always positive for R&D investment ( Yoo and Sung, 2015 ). These authors state that the main role of such directors is not to promote R&D activities but to discipline the strategic decisions taken by main shareholders. They thus become cautious and, as a result, may unwittingly affect long-term performance and discourage certain business strategies because they do not have access to all the information available on strategic decisions so base their approval on the available financial information ( Lorsch and Young, 1990 ).

Internal directors, on the other hand, may be more likely to adopt new strategies for new product development because they know more about such products so do not perceive so much uncertainty ( Hill and Snell, 1988 ; Hoskisson et al. , 2002 ). Baysinger et al. (1991) conclude that senior executives may be more prepared to invest in risky R&D projects if they are well represented on the boards because they are less dependent on the opinions and evaluations of external directors and because the proportion of internal directors has a positive effect on the R&D expenditure of large enterprises. On the other hand, Hayes and Abernathy (1980) and Baysinger and Hoskisson (1989) argue that when companies emphasize financial goals instead of strategic control for evaluating managerial performance, they tend to prefer short-term strategies instead of long-term projects. Also, if senior executives are penalized for adopting strategies involving poor returns, they will be more reluctant to invest in risky R&D projects [4] .

Regarding the type of innovation and in comparison with external directors, internal directors may prefer internal innovation (new product development) to external innovation (acquisition) because of the uncertainty inherent in the latter. Also, external directors may find it difficult to evaluate the efficiency of strategic decisions ( Mizruchi, 1983 ; Lorsch and Young, 1990 ), including product development. Holmstrom (1989) argues that external directors may favor the external acquisition of innovation, in which case evaluation may be based on financial criteria because decisions do not require full understanding by the companies involved. In fact, the empirical evidence suggests that companies that carry out control based on financial information tend to favor external innovation ( Hitt et al. , 1996 ; Hoskisson et al. , 2002 ).

For another board characteristic, that of size, both a positive and a negative relation with innovation are possible. On the one hand, a larger number of directors increases the overall experience, information and advice that the company can resort to ( Goodstein et al. , 1994 ; Haynes and Hillman, 2010 ). It also offers more links with the external environment and, probably, more resources ( Jackling and Johl, 2009 ), because more directors increase the company’s access to a greater number of external resources, including the technological and financial ones that are essential for innovation ( Shapiro et al. , 2015 ). Therefore, a large board of directors can improve a company’s capacity to deal with uncertainty in the environment and can increase links with other partners ( Pfeffer and Salancik, 2003 ).

An alternative view suggests that a larger board may prevent it from being effective in its strategic decisions because, for example, there is greater diversity of opinions which may lead to conflict and mistrust among directors ( Amason and Sapienza, 1997 ), and to difficulties for meeting frequently or for coordinating different points of view ( Goodstein et al. , 1994 ; Yermack, 1996 ; Ruigrok et al. , 2006 ).

Regarding the empirical evidence, for Taiwan, Chen (2012) finds that R&D investment is negatively related to board size. But for the UK, Driver and Guedes (2012) do not find evidence of a significant impact of board size on R&D expenditure. Similarly, for China, Shapiro et al. (2015) obtain results indicating the board size has no impact on the introduction of new patents.

The educational level of board members determines their abilities and level of knowledge ( Barroso et al. , 2011 ). The highest educational levels are characterized by greater cognitive complexity ( Wally and Baum, 1994 ), leading to a greater capacity for grasping new ideas ( Barker and Mueller, 2002 ), adopting new behavior, defining problems better and searching for creative solutions to complicated problems ( Bantel and Jackson, 1989 ). Bearing in mind that R&D projects are complex, directors with a higher educational level may be more receptive to innovation ( Barroso et al. , 2011 ; Dalziel et al. , 2011 ). They may be able to take new technologies on board ( Lin et al. , 2011 ), acquiring new knowledge and processes, analyzing information much more precisely ( Escribá-Esteve et al. , 2009 ) and developing new methods for solving problems ( Wincent et al. , 2010 ). So, companies whose board members have a higher educational level will have a more thorough understanding of R&D processes and of external environments, so will be better equipped to implement R&D activities, in line with the findings of Chen (2012) and Lacetera (2001) .

In addition, more frequent board meeting allow directors to devote more time and effort to the company strategy and to business operations, sharing their experience, knowledge and judgment. This would provide more critical information and valuable resources ( Forbes and Milliken, 1999 ) for advising the management team on important matters for the company while reviewing the main strategic actions ( Haynes and Hillman, 2010 ). More frequent meetings are likely to result in a more efficient board ( Vafeas, 1999 ) and better governance ( Chiang and He, 2010 ) and are likely to be valuable for building and developing a network of relations among members ( Gabrielsson and Winlund, 2000 ). Such relations among directors may facilitate access to necessary resources (capital, information, talent, etc.), thus reducing the risk of a shortage of resources for R&D ( Chen and Hsu, 2009 ).

Also, frequent board meetings may give members a better understanding of R&D activities. In meetings they can develop alternative strategies, reducing uncertainty and therefore leading to a greater probability of success in innovative activities ( Wincent et al. , 2010 ). However, the results found by Chen (2012) do not support this positive relation between meetings and innovation.

Finally, the distinction between the roles of directors and of managers is clearest when the positions of President of the Board and CEO are separate ( Fama and Jensen, 1983 ), this being known as the absence of duality. Supervision by the board may clearly influence the impact of risk-taking by the CEO ( Hambrick and Finkelstein, 1987 ; Crossland and Hambrick, 2007 ). When a single person holds several positions (President of the Board and CEO), agency problems arise because of information asymmetries between the CEO and the board. Prior studies suggest that duality leads to unfavorable results for shareholders ( Hambrick and D’Aveni, 1992 ; Boyd, 1994 ; Webb, 2004 ; Petra and Dorata, 2008 ) or may lead to decisions to protect the wealth of all the stakeholders in the company being set aside ( Sahin et al. , 2011 ). On the other hand, the separation of these positions may reduce tension between the management and the board, and it is more likely that the President will adopt decisions with long-term potential and within economic and social benefits such as R&D investments ( De Villiers et al. , 2011 ). In line with this, Zhang (2012) also argues that separation of these positions may mean that not only shareholders’ interests are taken into account but also those of other stakeholders.

Against these arguments, for France, Lhuillery (2011) indicates that certain board practices that address shareholders, such as duality, may individually have a positive influence on R&D investments in line with the results also found by Driver and Guedes (2012) for the UK.

In summary, the relation between a company’s innovation and certain characteristics of its board seems clear from a theoretical point of view, with a positive effect expected the higher the educational level of board members, the number of board meetings and the lack of duality or accumulation of positions. However, in the case of board composition and size, the final influence on the degree of innovation will depend on compliance by the company with recommendations in codes of good governance.

Conclusions

This paper first carried out a theoretical review of the influence of ownership concentration and of different types of owner on innovation. It was noted that neither the theory nor the empirical evidence are conclusive for establishing a relation between these variables, because different authors find different results depending on the sample, country or firms studied. Second, no consensus was observed regarding the relation between board composition and innovation, with both positive and negative arguments being found, and with empirical evidence not always pointing in the same direction.

Although in recent years many researchers have been focusing on this field of study, a more consistent explanation still needs to be found for these relations. Also, since the empirical evidence is not extensive, most prior studies have analyzed the influence on innovation of the degree of ownership concentration ( Cho, 1998 ; Ortega-Argilés et al. , 2005 ; Brunninge et al. , 2007 ; Czarnitzki and Kraft, 2009 ; Shapiro et al. , 2015 ) or the identity of the main shareholders ( Hill and Snell, 1988 ; Kochhar and David, 1996 ; Lacetera, 2001 ; Xiao and Zhao, 2012 ; Yoo and Sung, 2015 ; Tsao et al. , 2015 ). But there have been fewer studies considering how one of the main governance mechanisms, that is, the board of directors, relates to innovation actions ( Wu, 2008 ; Driver and Guedes, 2012 ; Balsmeier et al. , 2014 ).

For these reasons, future research could focus on the influence of the board of directors on innovation for Spanish firms, a subject not yet studied in depth because, while Tribo et al. (2007), Ortega-Argilés et al. (2005) and Ortega-Argilés and Moreno (2009) use samples of Spanish firms, they only consider ownership structure as a determinant of innovation. In addition, Hernández et al. (2010) , using a sample of 86 Spanish quoted companies in technology companies, show how the ownership structure can moderate the relationship between board composition and R&D investments. Thus, it might be of interest to analyze how board characteristics and functioning may delimit innovation at both input and output level, focusing on the board characteristics that have traditionally been considered (composition, size, meetings, duality). 98.5 percent of Spanish listed firms have a majority of external directors on their boards ( CNMV, 2016 ) to comply with the code of good governance. Thus, if they see innovation as a strategic tool and also receive advice from internal members, they can be expected to carry out more innovation, especially by means of external acquisition. Similarly, in line with the Spanish good governance code, the average size of the board in Spanish firms is 9.8 members ( CNMV, 2016 ). This is not very large and is likely to reduce conflicts between board members and minimize problems of coordination, so there may be a positive effect according to innovation theory. Considering that the theory supports a positive effect, and the fact that the average number of meetings per year of Spanish listed firms is 10.6 (higher than the recommended figure), it can also be expected that during such frequent meetings, decisions on innovation will be taken. 54.7 percent of Board Presidents are also CEOs of their companies ( CNMV, 2016 ) so, since the positions are combined in almost one half of Spanish companies, a negative effect on innovation can be expected in Spain. However, other newer variables could be considered such as diversity within the board (gender, educational background, nationality, tenure, etc.), with analysis of the role played by another of the bodies with great influence, the management team (socio-demographic and psychological characteristics, type of management style, culture, values, etc.) on business innovation.

In addition, it might be possible to include moderating variables in the existing models. For example, in line with the study by Choi et al. (2015) (in the case of family firms), it might be of interest to consider whether growth opportunities moderate the relation between board characteristics and innovation.

Another possible line of research would involve a set of analyses to establish differences by country, depending on the type of legal system to which they are subject. Various studies have shown that a country’s legal origin and its impact on investor protection and financial development influence a variety of economic aspects including financial markets, labor and competitiveness, and therefore allocation of resources ( La Porta et al. , 2008 ). For example, Common Law countries afford greater protection for shareholders than Civil Law countries, which affects the development of governance mechanisms and might determine the innovation strategy. Such greater protection in the case of Common Law countries might reduce one of the negative effects of concentration on innovation. On the other hand, Spain has traditionally been classified as having a bank-based financial system because of the importance traditionally placed on the stakes held by banks in business capital. Spanish listed companies are characterized by high shareholder concentration and high levels of borrowing, mostly from banks. Regarding ownership structure, control is usually exerted by families, followed in importance by financial entities ( Sacristán and Cabeza, 2008 ). On the other hand, in systems based on capital markets, it is the latter that mostly allocate funds because firms request long-term funding from them while the banking system usually supplies short-term funds. Moreover, in this model, usually associated with countries such as the UK and the USA, ownership is dispersed ( Sacristán and Cabeza, 2008 ). While banks can paralyze innovation by extracting informational income and protecting established firms ( Rajan, 1992 ), markets are more likely to promote innovative, R&D-based industries ( Allen, 1993 ). It is for this reason that higher levels of innovation can be expected in countries with a market-oriented governance model.

In order to achieve the above-mentioned objectives in our country, a sample of Spanish non-financial listed companies over recent years could be used. The data could be taken from the SABI database and from companies’ annual corporate governance reports and annual reports which have to be filed with the National Stock Exchange Commission and posted on their websites. Information on management teams can be found on the internet, in documentation provided by companies, the “Who’s Who” directory, etc.

For Europe, the Amadeus (Bureau van Dijk) database could be used. This contains business and financial information on the 510,000 largest European enterprises, and searches can follow different criteria. It contains data on ownership structure, the stakes held by the different shareholders, direct or indirect ownership, and information on the ultimate owner. It also provides financial data (such as annual accounts), from which it would be possible to extract information on R&D expenditure.

The methodology to be used could be panel data analysis and, more specifically, the generalized method of moments, which affords two advantages. First, since information is available for various time periods, it is possible to control the individual effect or the unobservable heterogeneity of the firms by first differences. Second, it helps to mitigate endogeneity by avoiding bias in the ordinary least square regression coefficient when the error term is correlated with any of the explanatory variables by means of instrumental variables (lags).

Finally, regarding the limitations of this study, although the literature review is as thorough as possible, it is possible that some studies may have been omitted. Also this study does not have an empirical part allowing for the relations considered to be tested in future lines of research. Similarly, we are aware that for future research, performing empirical studies related not so much to the amount but more to the quality of corporate governance would face the added difficulty of how to obtain such information.

As far as we aware, Belloc (2012) is the only review of the literature that adopts a similar approach to this one although its presentation of prior empirical studies is less extensive than ours. More specifically, we give a more detailed review of the influence of ownership on innovation, making an explicit distinction according to the different identities of the main or largest shareholder. Also, unlike Belloc (2012) , who focuses on ownership structure and on some of the external control mechanisms, we analyze the relation between another of the main internal governance mechanisms, the board of directors with its different characteristics and firms’ innovation activity.

Some studies consider a corporate governance index rather than specific ownership measures as an explanatory variable. For example, Chiang et al. (2011) conclude that high levels of corporate governance control (a single construct made up of board size, independent directors, owner identity or the difference between control rights and cash flow) are positively linked to the technical and economic success of R&D activities but have no significant influence on commercial success.

Some studies, however, do not support a significant relation between ownership concentration and innovation ( Choi et al. , 2011 ).

Other studies do not find that the presence of managers on the board has a significant effect on R&D intensity ( Lacetera, 2001 ).

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• DOI: 10.54783/jemba.v2i1.36
• Corpus ID: 272035140

The Effect of Good Corporate Governance Mechanism on Company Financial Performance with Company Size As a Moderating Variable

• Tya Thirani Lea Gogalim , Diyah Pujiati , Agus Samekto
• Published in Journal of Economics… 22 July 2024
• Business, Economics

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Board of directors, audit committee, and firm performance: evidence from greece, analisis good corporate governance dan corporate social responsibility terhadap kinerja keuangan pt bank danamon indonesia tbk periode 2014 – 2016, pengaruh corporate governance dan struktur kepemilikan terhadap kinerja keuangan perusahaan.

• Highly Influential

PENGARUH GOOD CORPORATE GOVERNANCE TERHADAP KINERJA KEUANGAN PERUSAHAAN PERBANKAN YANG TERDAFTAR DI BURSA EFEK INDONESIA

Pengaruh good corporate governance terhadap kinerja keuangan dengan manajemen laba sebagai variabel intervening pada perusahaan perbankan yang terdaftar di bursa efek indonesia, pengaruh good corporate governance, pengaruh intellectual capital, good corporate governance, dan ukuran perusahaan terhadap kinerja keuangan perusahaan perbankan yang terdaftar di bursa efek indonesia, pengaruh good corporate governance, leverage, struktur modal dan ukuran perusahaan terhadap kinerja keuangan pada perusahaan sektor aneka industri yang terdaftar di bursa efek indonesia, pengaruh firm size dan leverage ratio terhadap kinerja keuangan pada perusahaan pertambangan, related papers.

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