What is it about?

This study analyzes the impact of corporate governance on firm efficiency. The recent trend to measure performance from efficiency ratios has received attention due to its realistic approach. However, empirical evidence to prove a significant relationship between corporate governance and firm efficiency is lacking. We study panel data on 2,823 firm-year observations of Chinese internet companies from 2005 to 2017, using data envelopment analysis with variable return to scale technology to measure efficiency. The efficiency scores of companies are then regressed on corporate governance variables to measure the effect on technical efficiency. Furthermore, fuzzy-set qualitative comparative analysis (QCA) analysis used to provide a deep empirical understanding of the phenomenon. This study contributes to the existing body of knowledge in two ways by providing a strategic framework for exploring the governance-efficiency relation by providing empirical evidence. In addition, this study uses multiple methodological approaches to provide useful insights into corporate governance and efficiency.

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Why is it important?

Although the findings in earlier research have shown the importance of corporate governance in firm performance, some reservations are expressed about the method used to measure firm performance. The profitability measures are weak methods, because profitability depends on extraneous, and, at times, unrelated factors such as market growth, demand, taxes, and exchange rate (Zhang and Ouyang 2017). This, therefore, raises serious questions as to the preciseness of the performance measures and calls for a more accurate approach. In response to this problem, we propose an efficiency measure, as a proxy of firm’s performance, that produces better results because of its more realistic ratios (i.e., input to output). The contribution of dysfunctional projects cannot be assessed with non-productivity (i.e., financial) measures. Therefore, an efficiency measure is an important tool for performance evaluation that considers the impact of unproductive decisions ignored by financial ratios.

Perspectives

This article has been written in the perspective of corporate governance and firm performance nexus. The fourth industry revolution has changed the business dynamics and models. Internet companies has become a large stakeholders of business ecosystem. This article will help the academician and practitioners to understand the impact of corporate governance in the special context of internet companies. Moreover, it provides a thought-provoking idea to measure the performance with new methods other then profitability.

muhammad Farooq
Dalian University of Technology

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This page is a summary of: Corporate Governance and Firm Efficiency: An Application of Internet Companies of China, Emerging Markets Finance and Trade, October 2019, Taylor & Francis, DOI: 10.1080/1540496x.2019.1667768.
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