The Effect of Corporate Governance on the Performance of a Company. Some Empirical Findings from Indonesia

Open access


Purpose: This study is aimed at analyzing the influence of the size of the board of directors, audit committee, institutional ownership and managerial ownership on the financial performance of manufacturing companies listed on the Indonesia Stock Exchange.

Methodology: The study analyses 156 Indonesia firms listed on the Indonesia Stock Exchange using linear regression analysis.

Findings: The results indicated that the size of the board of directors has a positive effect on financial performance, while the size of the audit committee, institutional ownership and managerial ownership has no effect on the financial performance. While on the simultaneously testing, it showed that the size of the board of directors, audit committee size, institutional ownership and managerial ownership influence the financial performance.

Research limitations/implications: The research has been limited to the manufacturing sector of Indonesian companies and the internal mechanism of corporate governance. The study suggests considering an external mechanism of corporate governance as predictor variables.

Originality: The study adds to the literature of corporate government and firm performance in emerging countries. The study implies that corporate governance mechanism for audit committee, managerial ownership and institutional ownership do not enhance company performance. The average size of an audit committee just to fulfill the regulation. Corporate governance mechanism that improve financial performance is size board director. Improvement in board performance as board size increase has positive impact that enhance financial performance of company.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Aanu O.S. Oduanonses I.F. and Foyeke O.I. (2014). Effectiveness of Audit Committee and Firm Financial Performance in Nigeria: An Empirical Analysis. Journal of Accounting and Auditing: Research and Practice: 1-11

  • Ahmad Che Ayoib and Mohd Abdulloh Jusoh (2014). Institutional ownership and market-based performance indicators: Utilizing generalized least square estimation technique. Procedia - Social and Behavioral Sciences 164: 477-485

  • Aljifri K. and Moustafa M. (2007). The impact of corporate governance mechanisms on the performance of UAE firms: An empirical analysis. Journal of Economic and Administrative Sciences 23(2): 71-93

  • Amer Mrwan Aiman A. Ragab and Shehata Elsayed Shehata (2014). Audit Committee Characteristics And Firm Performance:Evidence from Egyptian Listed Companies. Proceedings of 6th Annual American Business Research Conference 9-10. New York.

  • Anderson R.C. Mansi S.A. and Reeb D.M. (2004). Board characteristics accounting reportintegrity and the cost of debt. Journal of Accounting and Economics 37: 315-342

  • Andow Helen Afang and Bature Musa David (2016). Ownership structure and the financial performance of listed conglomerate firms in Nigeria. The Business and Management Review 7(3).

  • Belkhir M. (2009). Board of directors’ size and performance in the banking industry. International Journal of Managerial Finance 5(2): 201-221

  • Bugshan T. (2005). Corporate Governance Earning Management and the Information Content of Accounting Earnings. Theoritical Model and Empirical Tests Phd Thesis Bond University Queensland Australia.

  • Bouaziz Z. (2012). The Impact of the Presence of Audit Committees on the Financial Performance of Tunisian Companies. International Journal of Management & Business Studies 2(4): 57-64.

  • Bozek Agnieszka. (2015).Positive Psychology Capital Concept: A Critical Analysis in the Context of Participatory Management. Management and Business Administration. Central Europe 23(3): 19-31

  • Chung K. and Zhang H. (2011). Corporate Governance and Institutional Ownership. Journal of Financial and Quantitative Analysis 46(1): 247-273

  • Cremers K.J. Martin and Vinay B. Nair (2005). Governance Mechanisms and Equity Prices. Journal of Finance 60(6): 2859-2894

  • Cole Re and Mehran Hamid (1998). The effect of changes in ownership structure on performance: Evidence from the thrift industry. Journal of Financial Economics 50(3): 291-317

  • Coles J.L. Daniel N.D. and Naveen L. (2008). Boards: Does one size fit all? Journal of Financial Economics 87: 329-356

  • Cornett M.M. Marcus A.J. Saunders A. and Tehranian H. (2007). “The impact of institutional ownership on corporate operating performance”. Journal of Banking and Finance 31: 1771-1794.

  • Dalton D.R. Daily C.M. Johnson J.L. and Ellstrand A.E. (1999). Number of directors and financial performance: A meta-analysis. Academy of Management Journal 42: 647-687

  • Daniel W.E. (2003).Corporate Governance in Indonesia Listed Companies - A Problem of Legal Transplant. Bond Law Review 15: 343-375.

  • Decision of the Chairman of BAPEPAM-LK No. Kep-643/BL/2012: Establishment and Implementation Guidelines for the Audit Committee.

  • Demsetz H. and Lehn K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy 93(6): 1155-1177

  • Din Shahab-u - and Javid Attiya Yasmin (2011). Impact of managerial ownership on financial policies and the firm’s performance: evidence Pakistani manufacturing firms. International Research Journal of Finance and Economics 81: 13-29.

  • Duggal R. and Miller J.A. (1999). Institutional ownership and firm performance: The case of bidder return. Journal of Corporate Finance 5: 103-117

  • Dwivedi N. and Jain A.K. (2005). Corporate governance and performance of Indian Firms: The effect of board size and ownership. Employee Responsibilities and Rights Journal 17(3): 161-172

  • Faccio M. and Lasfer M.A. (2000). Managerial ownership board structure and firm value: The UK evidence. City University Business School working paper.

  • Financial Service Authority (2014). Indonesia Corporate Governance Roadmap: Towards Better Governance of Issuers and Public Company. Financial Service Authority - Indonesia.

  • Al-Ghamdi Mohammed and Rhodes M. (2015). Family Ownership Corporate Governance and Performance: Evidence from Saudi Arabia. International Journal of Economics and Finance 7(2)

  • Horváth Roman and Persida Spirollari (2012). Do the Board of Directors’ Characteristics Influence Firm’s Performance? The U.S. Evidence. Prague Economic Papers 4: 470-486

  • Issarawornrawanich Panya (2015). The Association between Board of Directors’ Characteristics and Firm Performance: Empirical Evidence from Emerging Market of Thailand. Journal of Applied Business and Economics 17(1): 54-65.

  • Jensen M.C. and Meckling W.H. (1976). Theory of the firm: managerial behavior agency costs Journal of Financial Economics 3(4) 305-360.

  • Jensen M. (1993). The Modern Industrial Revolution Exit and the Failure of Internal Control Systems. The Journal of Finance 48(3): 831-880

  • Kaserer Ch. and Moldenhauer B. (2005). Insider Ownership and Corporate Performance - Evidence from Germany. Center for Entrepreneurial and Financial Studies (CEFS) and Department for Financial Management and Capital Market. Working Paper.

  • Klein A. (2002). Audit Committee Board of Director Characteristics and Earnings Management. Journal of Accounting and Economics 33(3): 375-400

  • Krishnan Jagan and Lee JongEun (2009). Audit Committee Financial Expertise Litigation Risk and Corporate Governance. Auditing: A Journal of Practice and Theory 28(1): 241-261

  • Kumai Benjamin Gugong and Husaini Bala (2015). Equity Formation And Financial Performance of Listed Deposit Money Banks in Nigeria. European Journal of Accounting Auditing and Finance Research 3(8).

  • Najjar Dana-AL (2015). The Effect of Institutional Ownership on Firm Performance: Evidence from Jordanian Listed Firms. International Journal of Economics and Finance 7(12): 97-105

  • McVey R. (1992). The materialisation of the Southeast Asian entrepreneur. In: R. McVey (ed.) Southeast Asian capitalism. New York: Cornell University Southeast Asia Program.

  • Morck Randall Shleifer Andrei and Vishny Robert W. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics 20(1-2): 293-315

  • Quang Do Xuan and Wu Xong (2014).The Impact of Ownership Structure and Capital Structure on Financial Performance of Vietnamese Firms. International Business Research 7(2): 64-71

  • Santos Juliana Bonomi and Luiz Arthur Ledur Brito (2012). Toward a Subjective Measurement Model of Firm Performance. Brazilian Administration Review Special Issue 6: 95-117

  • Siagian F.T. (2011). Ownership Structure and Governance Implementation : Evidence from Indonesia. International Journal of Business Humanities and Technology 1(3): 187-202.

  • Uwuigbe U. and Olusanmi O. (2012). An empirical examination of the relationship between ownership structure and the performance of firms in Nigeria. International Business Research 5(1): 208-215.

  • Van Essen M. Van Oosterhout J.H. and Carney M. (2012). Corporate boards and the performance of Asian firms: A meta-analysis. Asia Pacific Journal of Management 29(4): 873-905

  • Wasowska A. (2013). Ownership Structure and the Internationalization Process of Publicly-Listed Companies in Poland. Management and Business Administration. Central Europe 22(3): 82-97

  • Walczak W. (2013). Failures of Corporate Governance in Housing Cooperatives - Case Study. Management and Business Administration. Central Europe 22(3): 58-81

  • Xie B. Davidson W.N. and DaDalt P.J. (2003). Earnings Management and Corporate Governance: The Role of Board and The Audit Committee. Journal of Corporate Finance 9: 295-316

  • Yermack D. (1996). Higher Market Valuation of Companies with a Small Board of Directors. Journal of Financial Economics 40(2): 185-211

  • Yilmaz Cahit and Ali Hakan Buyuklu (2016). Impacts of Corporate Governance on Firm Performance: Turkey Case with A Panel Data Analysis. Eurasian Journal of Economics and Finance 4(1): 56-72

  • Zabrie Shafie Mohamed Kamilah Ahmad and Khaw Khai Wah (2016). Corporate Governance Practices and Firm Performance: Evidence from Top 100 Public Listed Companies in Malaysia. Procedia Economics and Finance 35: 287-296

  • Zhuang J. et al. (2000). Corporate Governance and Finance in East Asia Vol. 1. Asian Development Bank Philippines Manila.

Journal information
All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 1556 903 94
PDF Downloads 964 551 25