The Relationship between Governance Indicators and Firm Performance

Abstract

The present study is concerned about the relationship between governance indicators (control of corruption, government effectiveness, regulatory quality, political stability, voice and accountability, and role of law) and performance (return on assets based book value, return on assets based market value, return on equity based on book value, return on equity based on market value, sales growth rate, net income growth rate, and Tobin’s q ratio) in listed companies on the Tehran Stock Exchange. Data related to firm performance indexes were gathered from 296 listed companies on the Tehran Stock Exchange from 1996 to 2016 by using the systematic elimination method. The data of six-fold governance indicators are computed annually by the World Bank and Heritage Foundation for different countries based on similar criteria. Moreover, the resultant statistical tests from panel data methods and multiple regression were administered using data analysis and R Software. The study results indicate a positive or inverse significant relationship between six indicators of corruption control, government efficiency, quality of law, political stability, right to comment, law rule, and listed companies' performance on the Tehran Stock Exchange. This study is innovative. It analyzes the relationship between all governance indicators and various firm performance measurements, which is not assessed in the Iranian and international studies. Hence, this study can contribute considerably to the development of knowledge in this field.

Keywords

• governance indicators
• firm performance
• heritage foundation
• world bank