Mainstream theories of corporate governance and the corporate governance – firm performance relationship

This paper reviews the mainstream theories of corporate governance and the relationship between corporate governance structures and firm financial performance. We show that the four predominant theories often employed to study the corporate governance – firm performance relationship are agency theory, stewardship theory, resource dependence theory, and institutional theory. In spite of being an overwhelmingly predominant theoretical approach in corporate governance studies, agency theory has recently been criticized for not fully reflect corporate governance practices in various institutional contexts. It is, therefore, necessary to re-examine the traditional agency framework to understand the corporate governance – firm performance relationship in various institutional environments. There are also calls for the application of a multi-theoretical approach to capture the complex nature of the corporate governance – firm performance relationship. It is also clear from our review that the effect of corporate governance on firm performance is inconclusive as empirical findings concerning this relationship are mixed in different analysis contexts. It is argued that such inconclusive findings of the corporate governance – firm performance relationship may be caused by the national institution differences and the imperfection of estimation techniques. Several recent studies in corporate governance support the view that the implementation of corporate governance mechanisms in a country is influenced by its institutional environment. For this reason, the effectiveness of corporate governance mechanisms also varies from country to country, or in other words, it is country-specific. This suggests that future research focusing on cross-national comparative contexts may provide more insight or in-depth information on the corporate governance – firm performance relationship. We also suggest that the potential mediating impacts of institutional characteristics on the corporate governance – firm performance relationship should be taken into consideration when conducting cross-country comparative corporate governance studies.