Ownership Structure, Corporate Governance, and Firm Performance: Evidence from Turkey

Abstract

Do corporate governance practices affect firm performance? Are shareholders willing to pay a premium for higher governance standards? How does the ownership structure of a firm affect its corporate governance practices and firm performance? We investigate whether differences in the quality of firm-level corporate governance affects firm performance. Constructing a broad corporate governance index for listed Turkish companies, we document positive relationship between governance scores on Tobin’s Q as a measure for firm performance. We find that firms with better corporate governance scores in our model have higher firm values, which implies that firms can increase their valuations by restructuring their corporate governance standards. Our study does not find significant relationship between corporate governance scores and other performance measures like ROA and stock returns. We explain this phenomenon through the signalling effect of better corporate governance practices. We also investigate whether ownership structures are related to corporate governance practices and firm performance. We find evidence that listed companies with higher foreign ownership ratios have also higher corporate governance standards. We also document that higher foreign ownership ratio causes higher firm performance measured by Tobin’s Q. Moreover, we find that listed companies with higher corporate governance scores and higher foreign ownership ratios experienced a smaller reduction in their share prices during the recent equity market crash in Turkey parallel to the global equity markets.