Ahmed Dan Hamdan 2015

European Journal of Business and Innovation Research
Vol.3, No.5, pp.25-48, December 2015

___Published by European Centre for Research Training and Development UK (www.eajournals.org)=
THE IMPACT OF CORPORATE GOVERNANCE ON FIRM PERFORMANCE:
EVIDENCE FROM BAHRAIN STOCK EXCHANGE
Esra Ahmed1 and Allam Hamdan2
Master’s Degree in Business Administration (MBA), Ahlia University – Bahrain.
1
2
Associate Professor of Accounting, Head of Accounting & Economics Department, Ahlia
University – Bahrain.
ABSTRACT: Corporate governance is recognized as one of the most important implications

to build a marketplace confidence and to attract positive investors in the organization
specifically and the economy generally. Promoting good corporate governance standards
considered to be very important in attracting investment capital, reducing risk and developing
firms’ performance. The aim of this research was to examine the impact of corporate
governance characteristics on firm performance in Bahrain Stock Exchange. Previous
literature reviews presented in the study found that corporate governance are successful in
improving firm's performance. The study sample contained 42 Out of 48 Bahrain's financial
companies which are listed in Bahrain Stock Exchange during the period 2007-2011. The
descriptive results indicated that our sample firms fulfill corporate governance variables about
61.2% for the entire period in the study. The empirical results indicate that performance
measures such as Return on Assets and Return on Equity are significantly related to corporate
governance in Bahrain. However, Earning Per share performance measure is not showing any
significance impact related to corporate governance. Overall, this study found a positive
influence of corporate governance mechanisms on performance for the entire firm in Bahrain
Stock Exchange. Thus, it is recommended that further research be undertaken from different
aspects: The effect of corporate governance variables and their impact on firm’s performance
in the Gulf Cooperation Council (GCC) and the effect of Global Corporate Governance on
performance during the current Global Financial Crisis.
KEYWORDS: Corporate Governance, Firm Performance, Bahrain Stock Exchange (BSE)
INTRODUCTION
Many researchers have been carried out their studies to identify corporate governance, focus
on what are its characteristics and how these characteristics impact the performance of the
entire firm. Studies found many answers related to researchers queries via providing a clear
definition of good corporate governance and their ethics and procedures used in order to
perform, manage and monitor a business. The majority of these studies were to examine the
relation among corporate governance mechanisms and performance measures.
After the collapse of Enron and the corporate scandals that started in October 2001 till present
day, the confidence of the shareholders begins to shake in the marketplace. Thus, several
investors, board of directors and government regulators have encouraged businesses to
emphasis on corporate governance from different sides such as accounting and finance,
economies, law and management. Furthermore, countries and economies differ regarding on
what governance mechanisms are used. For instance, the majority of Taiwan businesses are
family ownership, whereas in Angelo American economy; equity market is the most popular
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one. However, the most important aspect to structure the firm appropriately whether it’s in
Asia, Europe or USA is to implement the right governance mechanisms in order to help
businesses in the process of decision making. There is yet no universally definition of corporate
governance. Nevertheless, the most definition of corporate governance which is broadly used
is “the system by which companies are directed and controlled" (Cadbury Committee, 1992).
There are few studies which examine the effect of corporate governance on performance
measures on the GCC business environment and this study may be the first one to do so in
Bahrain. Bahrain is one of the fastest growing economies globally and its government is keen
to support good corporate governance mechanisms to increase investor confidence and
encourage market improvement.
This study provides empirical evidence from Bahrain on the impact of corporate governance
on company’s performance measures .Bahrain considers one of most unique and attractive
marketplace in the region as it provides great opportunities for more investment flows. This
research is a contribution to previous studies to investigate the effect of corporate governance
practices among performance measures for the entire firm as well as propose the proper
organizational structure. Also the study is conducted to differentiate between good and bad
governed firms in order to build a marketplace confidence and to attract positive investors in
the organization. The main objectives in this study are presented as follows:
- Determine a line to distinguish between good and bad corporate governance;
- Demonstrate the effect of corporate governance practices on firm’s performance in the
financial sector;
- Increase the awareness on agency theory and its relative costs; and
- Illustrate the Bahraini market generally and the Bahrain Stock Exchange specifically.
LITERATURE REVIEW AND PREVIOUS STUDIES
The impact of corporate governance variables on firm performance has been investigated in
many studies around the world. This part will review some of these studies that are related to
our study in somehow from different countries.
Sayla Siddiqui (2014) investigated the effect of corporate governance characteristics on firm
performance based on 25 previous researches. The study consists of three particular concerns
namely the effects of (1) legal organisms, (2) governance structures and (3) accounting or
market performance measures. Findings indicate that the value of the market of business
performance measured by Tobin’s Q in the marketplace and finally the study found that market
to book ratio is the fundamental value of this relation.
Pooja Gupta and Aarti Mehta Sharma (2014) examined a study to determine the impact of
corporate governance variables on firm performance in Indian and South Korean companies.
Results illustrate that corporate governance has limited effect on both the company's share
prices as well as on their financial performance.
Another study was conducted by S.Danoshana and T.Ravivathani (2014) to explore the effect
of corporate governance on business performance of 25 listed financial institutions in Sri Lanka
for during the period 2008-2012. Return on equity and Return on assets were used in the study
as they are the key variables to define business performance. Analysis findings show that
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corporate governance variables are significantly effect on business's performance and board of
directors size and audit committee size have effect positively the business's performance.
Nevertheless, meeting frequency is negatively associated with business's performance.
Dale Griffin, Omrane Guedhami, Chuck C.Y. Kwok, Kai Li and Liang Shao (2014) carried out
a research to examine the relation among National Culture, Corporate Governance Practices,
and firm performance. By using a new database from Governance Metrics International
measures of corporate governance practices across large number of countries for the sample
period of 2006-2011, they found that according to the stock market-based, financial system of
a country is has a negative impact with transparent disclosure and minority shareholder
protection.
Onakoya, Adegbemi Babatunde O, Fasanya, Ismail O, Ofoegbu and Donald Ikenna (2014)
conducted a study to explore the effect of corporate governance characteristics on bank
performance in Nigeria. The final sample consists of 9 banks for the sample period of 2006-
2010. It is found that both of board size and ownership structure are positively impacted on
return on equity. Nevertheless, the study found that corporate governance practices is
negatively associated with companies' assets. In addition, Results show that there is no effect
of board structure since it considers as a profitability measures predictor.
Jackie Krafft, YipingQu, Francesco Quatraro, and Jacques-Laurent Ravix (2013) investigated
the relationship of corporate governance among value and firm's performance. The analysis
concentrates on mergers, investigates the system of how non US corporations are adopting the
US best practice with its propositions. Based on the empirical analysis of the study, it is found
that many that corporations are significantly adopting US corporations’ best practice associated
to corporate governance.
Guo and Kumara (2012) carried out a research to test the effect of corporate governance
measures on firm performance in Sri Lanka. The study sample consists of listed firms from
Colombo stock exchange. Findings found that size of board of directors is negatively associated
with the value of the firm and effect of proportion of outside directors on operating performance
of a firm.
Fatimoh Mohammed (2012) conducted a study to explore the impact of corporate governance
mechanisms on bank performance on 9 Nigerian banks with a sample period of ten years (2001-
2010). The analysis found that corporate governance is significantly associated with banks
performance. Moreover, it indicates the definition of poor asset quality and loan deposit ratios
were found to have a negative impact on business performance.
Sami et al. (2011) conducted a study to demonstrate the link between among operating
performance and corporate governance of Chinese listed companies. Findings show that firm
performance is positively associated with different measures of governance.
Masood Fooladi (2011) investigated the effect of corporate governance on performance
measures on a sample of 30 Malaysian firms with a sample collected from 2007 fiscal year
annual reports of those firms. Findings indicate that CEO duality is negatively associated with
performance measures namely ROE and ROA. This appears because CEO duality is found to
reduce the board of directors' efficiency. Besides, the relationship among the independent of
board of directors, size of the board of directors and ownership structure and firm performance
is found to be insignificant.
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Ehikioya (2009) found to have insignificant influence between CEO duality and firm
performance, whereas positive association among ownership structure and performance.
Regarding the link between board composition and firm performance, the study was
unsuccessful to present evidence related to this relationship. However, the researcher
recommended that whenever the board consists of more than one of family members,
performance will be affected negatively.
Lam & Lee (2008) recommended that both of the agency and stewardship theories were the
only corporate governance theories to give clear explanation about duality and performance.
The empirical analysis of the study found significant impact of duality on firm performance for
non-family companies and vice versa.
RESEARCH METHODOLOGY
This part will include three sections. Study sample and resources of data, second section will
be study models and the last one will be measuring of variables and statistical tools.
Study sample and resources of data
Several sources have been used in this study for data analysis. The information needed about
firm’s performance and corporate governance characteristics are collected from the Bahrain
Stock Exchange database (BSE) which contains 48 listed companies. Companies were selected
according to the following criteria: Data is available in the period of 5 years (2007 to
2011).Companies have not been closed or emerged with any other company during the study
period.
There are two Close companies during the study period and four non- Bahraini companies
which excluded from the sample. Therefore; the final sample consists of 42 companies,
representing 87.5% of the original sample.
Data was obtained from Bahrain Stock exchange data base. The study sample contained 42 Out
of 48 Bahrain's financial companies which are listed in Bahrain Stock Exchange during the
period 2007-2011. The Sample Selection procedure is displayed in table 1.
Table (1) Sample Selection
# Sector Listed Companies Excluded Companies Study Sample

1 Commercial Banks 8 0 8
2 Investment Sector 12 0 12
3 Insurance Sector 5 0 5
4 Service Sector 9 0 9
5 Industrial Sector 3 0 3
6 Hotel- Tourism 5 0 5
7 Closed Companies 2 2 0
8 Non Bahraini Companies 4 4 0
Total 48 6 42
Research Hypothesis
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Evidence from previous empirical studies from academic literature review has sought to
confirm the impact of corporate governance practices on firm’s performance. A literature
review from relevant academic studies has pointed out the following characteristics applied to
corporate governance such as:
Brown and Caylor (2004) conducted a study on a total of 2327 US data firms with a database
collected from the Institutional Shareholder Service (ISS), examined 51 factors along with 8
categories. Results found that good governed firms are more profitable and more valuable
comparing to other firms. Furthermore, Black (2001) claims that greater impact of corporate
governance mechanisms are most probably found in developed countries. This could be
explained as those countries were found to have weak regulations and superior differences
among firms in corporate governance mechanisms.
Based on what was mentioned in the previous arguments from different studies, the first
hypothesis may be formed as follows:
H01: There is no significant difference between the Bahraini public shareholding firms in the
application of the characteristics of corporate governance.
Ha1: There is significant difference between the Bahraini public shareholding firms in the
application of the characteristics of corporate governance.
Many previous studies have provided evidences on linking good corporate governance with
better firm’s performance. This means that corporate governance improves company
performance (Hossain, Cahan and Adams, 2000).On the other hand, other researchers have
demonstrated negative impact of corporate governance on firm performance (Hutchinson,
2002). Nevertheless, some researchers have found insignificant relation between good
corporate governance and firm performance (Young, 2003).
Thus, the second main hypothesis may be formed as follows:
H02: There is no significant impact of corporate governance on performance in Bahrain Stock
Exchange.
Ha2: There is significant impact of corporate governance on performance in Bahrain Stock
Exchange.
The second hypothesis may be divided into three sub hypothesis according to the performance
dimension that will be studied.
Financial Performance
Effective corporate governance practices are successful to gain profits, whereas the
organization with week governance practices get less financial benefits. Organizations having
poor governance structures delivered less value to investors, conversely firms with efficient
governance procedures gave much (Nandelstadh and Rosenberg, 2003).Thus, the first sub
hypothesis may be formed as follows:
H02.1: There is no significant impact of corporate governance on financial performance
in Bahrain Stock Exchange.
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Ha2.1: There is significant impact of corporate governance on financial performance in
Bahrain Stock Exchange.
Operational Performance
Sami et al. (2011) investigated the association between operating performance and corporate
governance of Chinese listed companies. Findings show a favorable relation among different
measures of governed firms and performance. Thus, the second sub hypothesis may be formed
as follows:
H02.2: There is no significant impact of corporate governance on operational
performance in Bahrain Stock Exchange.
Ha2.2: There is significant impact of corporate governance on operational performance
Stock Performance
Gompers et al. (2003) pointed out that during 1990s stock returns of organizations, where rights
of shareholders were protected more efficiently had outperformed the corporations with less
protection of rights of investors approximately by 8.5% per year during this decade.
Thus, the third sub hypothesis may be formed as follows:
H02.3: There is no significant impact of corporate governance on stock performance in
Ha2.3: There is significant impact of corporate governance on stock performance in
Study Models
This research tries to find the impact of corporate governance on firm performance.
Governance indices have been constructed for Europe and the United Kingdom, Germany,
Russia, Korea, the United States, and several emerging markets. They are used to illustrate the
relation between corporate governance and performance. (Black et al., 2006). Mostly, these
researches are significantly positive and in this study, a research framework is presented in
graph 1.
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Graph 1: Theoretical Framework model
To determine the relation between corporate governance and performance after controlling the
factors, we estimate the following regression model:
Perf i   0  1OLShi   2 SBoard i   3OThLShi   4 IndepBi

  5 ChCSEOi   6 PManageri   7 Sizei   8 Leveragei  k 1  k Sectori ,k  i.....
ne7
Where:
 Perfi: is a continuous variable; the dependent variable is the ratio of the number of
shares, held by institutional investors to the total number of shares outstanding, for the
company (i).
 β0: is the constant.
 β1..8: is the slope of the independent and controls variables.
 OLShi: is dummy variable, coded 0 if a shareholder owned more than 20% and 1
otherwise, for the company (i).
 SBoardi: is dummy variable, coded 0 if the board of directors’ members is not between
7-13 members and 1otherwise, for the company (i).
 OThLShi: is dummy variable, coded 0 if the ownership of the three largest shareholders
more than 50% and 1 otherwise, for the company (i).
 IndepBi: is dummy variable, coded 0 if the board of directors is not controlled by more
than 50% independent outside directors and 1 otherwise, for the company (i).
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 ChCSEOi: is dummy variable, coded 0 if the chairman is also the CEO and 1 otherwise,
for the company (i).
 PManageri: is dummy variable, coded 0 if the property of managers in the company's

shares not between 1-20% and1 otherwise, for the company (i).
 CSizei: is a continuous variable: the company size, for the company (i).
 Leveragei: is a continuous variable: Financial Leverage is the ratio of total debt to the
book value of total assets, for the company (i).
 Sectori,k: is a continuous variable: the Type sector in which the company (i) belongs
to, and it is divided into seven sectors.
 εi: random error.
Measuring of variables
Variables used in this empirical study include: (1) dependent variable (firm’s performance);
(2) independent variables (corporate governance); plus (3) control variables. Concepts and
measurements of these variables are summarized in Table 2 below.
Table 2 The labels and measurement of the variable
Variable Label Definition and Measurement

Dependent variables:
Financial performance ROE Is the ratio of net profit attributed to
shareholders/equity.
Operational performance ROA Is the ratio of net income to the book value of total
assets.
Sock performance EPS Is the ratio of net profit after taxes and preference
dividends by the number of outstanding equity
shares.
Independent variables:
Corporate governance
characteristics:
Ownership of the largest OLSh Dummy variable coded 0 If a shareholder owned
shareholder. more than 20% and 1 otherwise.
Size of the board of directors. SBoard Dummy variable coded 0 if the board of directors
members are not between 7-13 member and 1
otherwise.
Ownership of the three largest OThLSh Dummy variable coded 0 if the ownership of the
shareholders. three largest shareholders more than 50% and 1
otherwise.
Independency of board of IndepB Dummy variable coded 0 if the board of directors
directors. is not controlled by more than 50% independent
outside directors and 1 otherwise.
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Posts of chairman and CEO. ChCSEO Dummy variable coded 0 if the chairman is also the
CEO and 1 otherwise.
Property of managers. PManager Dummy variable coded 0 if the property of
managers in the company's shares not between 1-
20% and 1 otherwise.
Control variables:
Company size CSize Natural log of total assets.
Financial leverage Leverage The ratio of total debt to total assets.
Firm Age FirmAge Is the number of years since the founding of the
company.
Dependent variable
In this study, three dependent variables were looked at, namely return on equity, return on
assets and earnings per share. Various empirical studies use financial measures to test the
relation between corporate governance and firm performance and those measures fit into
accounting measures as well as market measures (Kiel & Nicholson 2003). Accounting
measures such as return on assets (Kiel &Nicholson 2003) and return on equity (Baysinger &
Butler 1985) are the most common used in prior corporate governance studies.
Financial Performance
Return on equity has been considered as one of the most significant and commonly used
profitability financial ratios. Many researchers have employed ROE as firm performance
measure in their studies. ROE is an important indicator because it tells us how the firm has
used the resources of its owners. This ratio reflects the level to which the objective of
shareholders wealth maximization has been achieved.
Operational Performance
Return on assets was selected in our study because of its relative use in previous studies work
in determining how profitable a firm is. A study which was conducted by Coleman (2008), to
determine the effect of corporate governance on African firm performance; return on assets
was also employed to explore how profitable a firm was.
Stock Performance
Earning per share EPS is a profit attributable to equity shareholders divided by number of
ordinary shares. Most commonly used to evaluate a firm’s performance and it EPS measures
performance from an investors’ point of view. Gompers et al. (2003) explore that around 85-
90 % of the related accounting data measured in terms of net profit and earning per share.
Moreover, EPS demonstrate the total of available earnings by each ordinary shareholder, thus,
it shows the potential return on individual funds via comparing the EPS of different or same
entity’s in different periods or both for better figures.
Independent variable
The independent variables consist of six corporate governance variables as we mentioned
earlier such as: Ownership of the largest shareholder, Size of the board of directors, Ownership
of the three largest shareholders, Independency of board of directors, Posts of chairman and
CEO and Property of managers.
33
Control variable
As we mentioned earlier in this chapter, three control variables will be discussed for all
estimated models of our research. They are: Firm Size (total assets), Firm age and financial
leverage.
Firm Size
Many researchers have explained the link between firm size and firm performance in a number
of ways. Firm size is one of the most important control variables in our study. Firm Size can
be calculated if we take the natural log of total assets. In the case of return on assets is the
dependent variable, hence, firm size will be calculated as natural log of net sales.
Firm Leverage
The debt level of a firm has the potential to impact financial performance due to costs of finance
and risk of default. Essentially, firm leverage consists of shareholders borrowing money for
securities investment. Weill (2003) investigated "the relationship between leverage and
corporate performance". Findings indicated that results were mixed since Italian firms found
to have negative relationship whereas positive relationship in French and German firms.
Firm Age
Firm age is the total number of years from which a firm is starting their operations. Sami et al.
(2011) indicated that both of the financial growth as well as the capital structure of firms are
impacted with age factor. Furthermore, at the starting point of any business, firms are expected
to have more expenses as they have less experience in the market. As a result, total cost
structure of new firms is higher than old firms.
DATA ANALYSIS AND TESTING OF HYPOTHESIS

Descriptive Analysis
The number of initial populations for the firms being researched is 48. Samples are chosen
based on panel data to the 42 listed companies from Bahrain Stock exchange data base over
the year 2007 to 2011 excluding of 2 closed companies and 4 non-Bahraini firms.
Based on the samples of 42 chosen firms, we will measure the corporate governance
characteristics by using the indicators of (1) Ownership of the largest shareholder (OLSh), (2)
Size of the board of directors (SBoard), (3) Ownership of the three largest Shareholders
(OThLSh), (4) Independency of board of directors (IndepB), (5) Posts of chairman and CEO
(ChCSEO), and (6) Property of managers (PManager). Table (3-7) contains data of descriptive
statistics on governance characteristics for our study sample of firms over the period of 2007-
2011 respectively.
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Table 3: Descriptive statistics of governance (2007)
Corporate governance Frequency of 1’s Frequency of 0’s

Label
Characteristics: Frequency Percent Frequency Percent
Ownership of the largest OLSh 21 50 21 50
shareholder.
Size of the board of directors. SBoard 29 69 13 31
Ownership of the three largest OThLSh 24 57.1 18 42.9
shareholders.
Independency of board of directors. IndepB 12 28.6 30 71.4
Posts of chairman and CEO. ChCSE 29 69 13 31
O
Property of managers. PManag 38 90.5 4 9.5
er
Mean (Corporate governance 60.7 39.3
index)

Label
Ownership of the largest OLSh 20 47.6 22 52.4
shareholder.
Size of the board of directors. SBoard 30 71.4 12 28.6
shareholders.
Posts of chairman and CEO. ChCSE 28 66.7 14 33.3
O
er
index)
35

Label
shareholder.
Size of the board of directors. SBoard 29 69 13 31
shareholders.
O
er
index)

Label
shareholder.
shareholders.
O
er
index)
36
Frequency of 1’s Frequency of 0’s

Corporate governance
Label Frequenc Percent Frequency Percent
Characteristics:
y
Ownership of the largest OLSh 21 50 21 50
shareholder.
shareholders.
Independency of board of directors. IndepB 13 31 29 69
O
er
index)
The mean percent of corporate governance index for the entire period is more than 50% (around
61.2% on average), illustrating that our study sample meet more than half of the governance
variables. Therefore, we reject our first hypothesis and accept the alternative hypothesis as
follows:
Ha1: There is significant difference between the Bahraini public shareholding
companies in the application of the characteristics of corporate governance.
From the entire data in 2007-2011, most of the sample had chosen is showing that shareholders
owned more than 50% of a company’s outstanding shares. This is because the majority of
investors in the Bahrain market are mostly the owners of the firm. Therefore, controlling more
than half of the voting interests in the firm had impacted significantly on shareholders influence
in the business operations and strategic direction of the firm.
According to the corporate governance code in Bahrain “The board should have no more than
15 members, and should regularly review its size and composition to assure that it is small
enough for efficient decision making”. Based on our data, the interval for board size within
five years on average is 12 members. Therefore, our boards range result considered to be good
size as large number of members may not keep a business to use their resources in an efficient
manner (Central Bank of Bahrain, 2012).
Furthermore, Ownership of the largest shareholders is one of the important characteristic to
investigate the impact of having multiple large shareholders on the evaluation of the listed firms
selected in the data. We show that on average 43.8% of the firms listed in the data have multiple
large shareholders. This is represented in family businesses where they have managerial or
board control and they are more focused on their own benefits especially if there is no strong
monitoring by other shareholders.
Board independence is also is an important variable. The key element of an effective board is
to have a majority of an independent outsider's involvement. This means the greater the number
37
of outside members the better. Our data findings found that around 68.08% on average of the
firms during the years 2007-2011 their board of directors were not controlled by more than
50% independent directors for the firm. This means that more than half of the firms in the data
selected were not applying the board independence strategy. An independent outsider can be
defined as an individual who has never worked at the company and it has no relationship to
any of the employees, customers or any service providers such as accountants, investment
bankers, lawyers, etc. Unfortunately, this is misapplied in reality because the "outsider" label
is often given to a retired CEO or a family member where in fact an insider with interest
conflicts. Besides, few outside board members provide low level of corporate governance to
shareholders leading to less independent board members especially if there is no separation of
the positions between the chairman and the CEO.
Most commonly, it is apparently better to split the positions of CEO and chairman than to
combine them for good corporate leadership structure, improve regulations and develop
financial reports. Based on our data over the year 2007 to 2011, it is clearly mentioned that on
average of 69.04% of the firms were separating the chairman and the CEO for the company.
The corporate governance code in Bahrain suggested that the chairman must be an independent
director and cannot be the same person as the CEO in any circumstances to have a great power
for independent decision making of the board.
Finally, one of the important corporate governance characteristics is property of mangers. A
property manager can be defined as a person or firm charged to manage and operate a real
estate property for a fee if the landlord is unable to collect such details by in person. Our results
indicate that over the 5 years, more than 90% of the firms having property managers and their
company’s shares are between 1-20% for the firm.
Many landlords don’t have time or live too far a way to deal and collect rents. However, many
landlords in Bahrain prefer to handle these responsibilities themselves because unfortunately
not all property managers are honest or competent.
Firm's performance measures with control variables

After conducting descriptive statistic on the board governance characteristic of the firms taken
as samples, a regression analysis is done from variables of corporate governance characteristic
on firm performance measured with return on equity, return on asset, earning per share as well
as the control variables used for our estimated models such as firm age, size of a firm and firm’s
financial leverage.
The study of the impact of corporate governance characteristics on firm performance variables
is presented in this chapter using our study sample. Descriptive statistics is used to compare
and report the significance of the changes in the period of five years (2007-2011).Table 8
presents the descriptive statistics of the corporate study variables covering the years 2007-2011.
It shows number of observations, mean, standard deviation, maximum and minimum.
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Table 8: Descriptive Statistics of firm's performance measures with control variables
Std.
Variable Year Mean % Minimum % Maximum %
Deviation %
2007 6.34 0.00 16.66 4.44
ROE 2008 5.30 -13.01 19.79 5.97
2009 3.80 -13.81 17.74 5.48
2010 3.33 -39.69 16.36 8.23
2011 4.13 -17.12 16.61 5.58
2007 8.08 00.38 24.34 6.10
2008 4.15 -21.56 20.05 9.34
ROA 2009 0.52 -45.40 17.73 14.28
2010 3.49 -34.26 17.24 8.84
2011 2.83 -22.32 16.24 6.49
2007 2.16 0.00 79.92 12.96
2008 -10.80 -422.24 .31 67.62
EPS 2009 0.60 -1.03 24.13 3.82
2010 1.25 -00.29 48.26 7.72
2011 0.02 -0.07 .16 0.05
2007 23.95 1 50 12.42
2008 24.45 2 51 12.68
AGE 2009 25.45 3 52 12.68
2010 26.45 4 53 12.68
2011 27.45 5 54 12.68
2007 950.49 4.87 12344.48 2391.80
2008 943.26 5.25 10739.22 2206.58
Total Assets
2009 942.94 4.51 9788.80 2120.49
BD,000
2010 1030.76 5.03 10595.58 2386.37
2011 1037.60 4.79 10680.32 2410.61
2007 0.40 0.0010 0.93 0.30
2008 0.44 0.0012 0.93 0.30
Financial
2009 0.44 0.0382 0.90 0.29
Leverage
2010 0.43 0.0381 0.90 0.30
2011 0.43 0.0436 0.91 0.29
The mean is the average figure of the variable for the data set. The standard deviation is an
indication of how the data deviates around the mean. It is a measure of dispersion (variability).
The higher the figure, the higher it deviates around the mean value and is an indication of
margin of errors. Maximum value is the higher value and minimum value is the lowest value.
Firm performance as a dependent variable is measured with Return on Equity, Return on asset
and Earning per share. Return on equity measures the rate of return on shareholders' equity. It
is the efficiency measurement of the shareholders equity in generating profit. Furthermore,
return on asset measures the profitability and the effectiveness of firm assets in increasing profit
and shareholders interests. In addition, Earning per share also consider being one of the firms
39
profitability measurements and can be defined as the proportion of a net profit after taxes and
preferences from each dollar of outstanding shareholders equity.
As for control variables, they are firm age, firm size (total assets) and financial leverage. Firm
age is the total number of years from which a firm is starting their operations. Firm size is
natural logarithm of total sales and leverage is debt to equity ratio. All variables used in this
study and their definitions can be referred from Table 4.3 in chapter4.
As presented in Table 5.6, ROE averaged around 4.58 during the period 2007-2011 with a
minimum value of - 39.69 in 2010 to a maximum value of 19.79 in 2008. The average of return
on equity reduced in 2008 to 5.2993 and fall again in 2009 and 2010 to 3.8032 and 3.3297
respectively.
Average asset profitability (ROA) of the firms listed in BSE and reviewed in scope of the
analysis declined from 8.08% in 2007 to 0.52% in 2009 and started to rise again in 2010 to
3.5% and dropped again to 2.8% in 2011. Based on ROA, It is clearly mentioned that there is
a wide deviation between firms since the ROA mean for sample firms is fluctuating during the
5 years. Thus; the mean value for ROA indicates poor performance of management in obtaining
profit from firm assets. In addition, ROA is showing a negative figure for the minimum value
of ROA. This pointed to that some of the businesses within the sample experiencing financial
loss during the financial year 2008, 2009, 2010 and 2011 as in August 2007 turned out to be
the starting point for big financial crisis where many big names rise, fall, and fall even more.
Furthermore, the mean value for EPS for the entire period was -1.35446 on average, with a
minimum of -422.24 in 2008 and a maximum of 79.92 for 2011.
The mean age is 23.95 in the year 2007 and starts to increase to 27.45 in 2011.The maximum
value of the age of the firm is 54 in 2011 and minimum value is 5. These findings indicate that
listed firms have a long history of activity. Furthermore, the mean size indicator of total assets
is found to be 950497.57 in 2007 and starts increasing till it reached 1037609.07 in 2011. It
can be noticed that total assets was not affected with the financial crisis 2007-08. This is
because as the global economic crisis took hold, banks in the Global Council Cooperation
(GCC) countries were not affected directly through trade and financial channels. In other
words, GCC governments, central and individual banks reduced the effect of the global
economic crisis by decreasing the rate of the return of GCC banks in order to increase
profitability compared to western nations. Moreover, the mean of the leverage is 42.62% in
2011 while the maximum and minimum are 9.1and 4.3 respectively with standard deviation of
28.51.
Empirical Analysis
Empirical analysis tests the impact of corporate governance variables on firm’s performance
in Bahrain's financial sector. Ordinary Least Squares OLS test (Multiple regression) used to
explore the relationship of corporate governance variables among performance in Bahrain.
There are three categories of firm performance discussed in our research. They are financial
performance which is measured by return on Equity, Operational performance which is
measured by return on assets ROA and finally Stock performance which is measured by
earning per share EPS .According to the performance dimension that will be studied in our
research; three models of regression are devised to discover the association of corporate
governance among performance. The following formula is the study base model.
40
Firm performance = f (corporate governance variables)
Where firm performance is measured by three performance measures namely Return on Equity
(ROE), Return on Assets (ROA) and Earning per share (EPS). Corporate governance variables
are (1) Ownership of the largest shareholder (OLSh), (2) Size of the board of directors
(SBoard), (3) Ownership of the three largest Shareholders (OThLSh), (4) Independency of
board of directors (IndepB), (5) Posts of chairman and CEO (ChCSEO), and (6) Property of
managers (PManager) and Control Variables are total assets (CSize), financial leverage
(Leverage) and Firm age (FirmAge).
Perf i   0  1OLShi   2 SBoard i   3OThLShi   4 IndepBi

ne7
Therefore, we can write our main equations as:
ROEi   0  1OLShi   2 SBoard i   3OThLShi   4 IndepBi

ne7
ROAi   0  1OLShi   2 SBoardi  3OThLShi   4 IndepBi

 5ChCSEOi   6 PManageri   7 Sizei  8 Leveragei  k 1  k Sectori ,k  i.....
ne7
EPS i   0  1OLShi   2 SBoard i   3OThLShi   4 IndepBi

ne7
Table 9 displays the multiple regression results for the three models presented in the study. The
first column for each model shows the t-test which identifies the level of significance which is
shown in column two of each regression models. F statistics presents the overall significance
of the model and p- value is the probability that can be used to determine whether the
population means differ. The degree or percentage which the sample defines the dependent
variables is the definition of R- square. While the Adjusted R squared is a corrected goodness-
of-fit (model accuracy) measure for linear models. It identifies the percentage of variance in
the target field that is explained by the input or inputs. Hence, adjusted R- square in general
considered being the best value indicator for comparing the quality fitness of two models or
more.
Table 9: Regression results on the relation between corporate governance and firm's
performance with control variables.
Model 1 Model 2 Model 3

Models
ROE ROA EPS
Variables Label t-test Sig t-test Sig t-test Sig
Independent
Variables:
Ownership of the OLSh
-3.349 0.010 0.264 0.792 -0.713 0.477
largest shareholder.
Size of the board of SBoard
2.547 0.039 3.511 0.002 -0.738 0.461
directors.
41
Ownership of the three OThLSh
largest 0.499 0.619 0.867 0.387 0.589 0.557
shareholders.
Independency of board IndepB
2.222 0.041 2.342 0.039 -1.900 0.059
of directors.
Posts of chairman and ChCSEO
1.172 .243 .127 0.899 1.576 0.117
CEO.
Property of managers. PManager 2.375 0.042 .290 0.772 -.491 0.624
Control Variables:
Total Assets CSize 4.641 0.001 4.443 0.002 0.451 0.652
Financial Leverage Leverage - -
2.448 0.035 0.000 0.302
5.068 1.034
Firm Age FirmAge 2.192 0.045 1.157 0.249 0.301 0.764
F-Statistic 11.779 4.103 0.825
P-value 0.003 0.000 0.594
R2 0.053 0.160 0.004
Adj.R2 0.008 0.121 0.001
Test of first model (ROE)

Regression results of ROE model are stated that variables such as board size, independency of
board of directors and property of managers were found to have a positive impact with firm
performance.
On the other hand, the variable ownership of the largest shareholder is having a strong negative
association with ROE. This is because that the majority of Bahrain businesses are family owned
companies.
Moreover, two variables such as ownership of the three largest shareholders and posts of
chairman and CEO were not affected by ROE. According to the control variables, we found
that there is a clear positive relationship between leverage and return on equity. This is due that
in an ideal level of financial leverage, a company's return on equity increases because the use
of leverage increases stock volatility, increasing its level of risk which in turn increases returns.
However, the control variables total assets and firm age were not affected by ROE.
R square is 5.3% which indicates that the sample defines the dependent variables in this model
up to 5.3%. The F value for ROE is 11.779 and level of significance is 0.003 which is less than
0.05 (level of significance). Thus, it can be inferred from statistical results that corporate
governance variables has a significant relation on financial performance. Therefore, we reject
the null hypothesis and accept the alternative hypothesis as follows:
Ha2.1: There is significant impact of corporate governance on financial performance in
Our research finding of positive impact of governance on financial performance is in
conformance with existing research result of (Mitton, 2002). He argues that good governance
fosters good financial performance.
42
Test of second model (ROA)
The size and independency of the board directors found to have a positive impact on ROA.
Nevertheless, other variables were found to have no significant affect return on assets. Based
on control variables, the results indicate that there is positive relation between total assets and
return on assets. This is because ROA ratio shows the firms’ increasing its profitability with
relation to firms assets. In addition, ROA ratio demonstrates the efficiency of management in
using the firm’s total assets to generate income. Nevertheless, financial leverage is showing
negative relation with return on asset. For the reason that when a company starts to borrow
funds in order to increase its firm’s total assets, the management efficiency in using its asset to
make profit will decrease. Therefore, risk always involves as cost of borrowing is greater than
profit generating from the firms’ assets leading to large losses. Moreover, the variable firm
age in this model was found to have no significant affect return on assets.
R square and F- statistics of this model are 16% and 4.103 respectively. P- Value is 0.00 which
is less than 5% significant level. Hence we reject the null hypothesis and accept the alternative
hypothesis as follows:
Ha2.2: There is significant impact of corporate governance on operational performance
Chiang (2005) had written a research entitled:"An Empirical Study of Corporate Governance
and Corporate Performance". Findings show that corporate transparency had a positive impact
on operating performance and it considered one of the most significant indicators for corporate
performance evaluation. Thus, Chiang findings supported our study results as Chiang found a
positive relationship between good corporate governance and operating performance.
Test of third model (EPS)

The third model represents the regression analysis for Earning per share. All the variables
showing in this model are having a no significant connection with EPS. This means, corporate
governance has no influence on performance as depicted by EPS. In addition, all the control
variables showing in the EPS model are having a no significant connection with EPS. R square
for EPS model is 0.004, which shows that about 0.4% of the sample identifies EPS and F
statistic is 0.825. p- Value is 0.594 which is bigger than 0.05 (level of significance). Thus, we
accept our null hypothesis as follows:
H02.3: There is no significant impact of corporate governance on stock performance in
Allen (2005), finding similar results supported our research finding and concluded that
corporate governance mechanisms have no significantly impact on stock performance which
is measured by EPS.
In comparing the best regression model with the last three models discussed in our research ,
is the one with the largest adjusted R2-value.The adjusted R square of the three models ROE,
ROA and EPS are 0.8%, 12.1% and 0.1% respectively. Therefore, the best model in our
research is the ROA model.
43
CONCLUSION, STUDY LIMITATION AND FUTURE STUDIES:
This study commences with a discussion of the impact of corporate governance characteristics
on firm’s performance in the Bahraini economy. Results of the study are based on several
theoretical and empirical literature reviews on corporate governance characteristics from
different countries.
The Cadbury Committee defines corporate governance as “a system by which business
corporations are directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the company and spell
out the rules and procedures for making decisions on corporate affairs”. (OECD April 1999).
Extant literature documents that corporate governance are successful in improving firm's
performance. The best approach of good governance on the performance of a company maybe
appreciated if we recognize that growth is significantly associated with the investment size as
well as the efficiency of its allocation (Hauwa Lamino Abubakar, 2012).
As discussed earlier, the impact of corporate governance variables on firm performance in
Bahrain was tested with a study sample selected from the 42 listed companies in Bahrain Stock
Exchange (BSE) for the period of 5 years (2007- 2011).
According to the performance dimension studied in our research, firm performance was tested
using accounting measures such as return on equity, return on assets and earning per share.
Also, corporate governance variables were measured using five indicators such as ownership
of the largest shareholder, board of directors size, ownership of the three largest shareholders,
independency of board of directors, posts of chairman and CEO and property of managers.
Previous studies was used the SPSS statistical program to analyse the descriptive statistics and
regression models to test the effect of corporate governance on firm’s performance with control
variables. Therefore, SPSS was also used for our study since it is appropriate for our sample
size and the variables of the data.
The results of the study indicate that are practicing corporate governance structure. Descriptive
results found that our sample firms fulfil corporate governance system more than average level
(61.2%) for the entire period in the study. This study found that shareholders ownership is more
than 50% of a firm’s outstanding shares in Bahrain Stock Exchange. This is because the
majority of Bahrain trade is family business. Results also found that the average of the size of
board of directors the sample was 12 members which considered to be good size. In addition,
these boards are considered to be less independent with about 68.08% of firms in the data
selected which means the majority of the firms were not applying the board independence
strategy. Besides, around 69.04% on average of the firms is showing separation posts of the
CEO and board chair.
Empirical results found that corporate governance variables are significantly correlated with
return on equity and return on assets as the performance measures in Bahrain Stock Exchange.
So that hypotheses one and two are rejected. However, in our empirical study, EPS
performance measure did not show any significant impact related to corporate governance and
hence we accept the null hypothesis.
There are two of Corporate Governance characteristics namely size and the independency of
board of directors were found to have a positive significant impact on ROE and ROA. In
addition, the corporate governance variable Property of managers found to have a clear positive
44
relationship with firm performance as measured by ROE. However, ownership of the largest
shareholder is having a strong negative association with ROE. Further corporate governance
variables did not show any significant relationship to performance measures of ROE and ROA.
According to the control variables, the study provide evidence that there leverage is impacted
positively to return on equity performance measure. In addition, the results indicate that there
is positive relation between total assets and return on assets. However, financial leverage is
showing negative relation with return on asset.
Overall, the study provide evidence that there is a positive impact of corporate governance
variables on firm performance in Bahrain Stock Exchange as two out three models of our study
supporting our problem statement.
The study is considered to be limited because it studies performance in companies in a period
of five years only 2007-2011. This time series may be unstable because the global financial
crisis occurred during this period. Future studies may take longer and different time series or
study the effect of global financial crisis on corporate governance. The study was conducted in
Bahraini market and it is considered to be a small sample to be studied and it is considered to
be an emerging market. Further studies may be conducted on the whole GCC market, because
the GCC economies are considered to be having a lot of similarities in lows and nature of
economy.
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European Journal of Business and Innovation Research

Vol.3, No.5, pp.25-48, December 2015

ABSTRACT: Corporate governance is recognized as one of the most important implications

LITERATURE REVIEW AND PREVIOUS STUDIES

# Sector Listed Companies Excluded Companies Study Sample

Perf i   0  1OLShi   2 SBoard i   3OThLShi   4 IndepBi

 β0: is the constant.

 β1..8: is the slope of the independent and controls variables.

 PManageri: is dummy variable, coded 0 if the property of managers in the company's

 εi: random error.

Variable Label Definition and Measurement

DATA ANALYSIS AND TESTING OF HYPOTHESIS

Corporate governance Frequency of 1’s Frequency of 0’s

Table 4: Descriptive statistics of governance (2008)

Corporate governance Frequency of 1’s Frequency of 0’s

Corporate governance Frequency of 1’s Frequency of 0’s

Table 6: Descriptive statistics of governance (2010)

Corporate governance Frequency of 1’s Frequency of 0’s

Frequency of 1’s Frequency of 0’s

Firm's performance measures with control variables

Perf i   0  1OLShi   2 SBoard i   3OThLShi   4 IndepBi

Therefore, we can write our main equations as:

ROEi   0  1OLShi   2 SBoard i   3OThLShi   4 IndepBi

ROAi   0  1OLShi   2 SBoardi  3OThLShi   4 IndepBi

EPS i   0  1OLShi   2 SBoard i   3OThLShi   4 IndepBi

Model 1 Model 2 Model 3

Test of first model (ROE)

Test of third model (EPS)

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