Corporate governance is a recent concept that encompasses many issues like internal control, rights and relation with stakeholders, social responsibility of the business, structure and role of the management committee, management transparency (refers to the disclosure of all reliable and relevant information) and accountability (refers to broader corporate objectives to manage the socio-economic resources efficiency) and the like. It also entails planning and strategic development of the company, day-to-day operation, and knowledge of the market and the sound understanding of the business itself. Precisely speaking, corporate governance is all about corporate practices to meet the corporate objectives. According to Byrnes et al. (2003), After the high profile scandals of Enron, WorldCom etc. corporate governance are imputed in the Sarbanes-Oxley Act of 2002. This paper will try to find out the impact of corporate governance on firm performance. This paper will also try to show that better use of corporate governance help the firm to perform in an optimum level and if it is right better governed firm will have better performance than worse governed firm.

Jensen and Meckling (1976); Fama and Jensen (1983); Shleifer and Vishny (1997) cited that, incentive has been given to the managers to confiscate the assets of the firm by taking profitable projects but this is much beneficiary to the managers than maximizing shareholders wealth. According to Shleifer and Vishny (1997), effective corporate governance control the awards given by the stakeholders and creditors and increase the profitability of the firm by investing in a positive net present value projects. Brown and Caylor (2004) argued that, regulators and governance advocates argue that in most of the cases stock price goes down because of poor governance and if this is right the market price of the well governed firm should be relatively high than poor governed firms. On the other hand by considering cash flow hypothesis Jensen (1986), says that shareholders expects cash flow via dividend payout but large free cash flow through dividend decrease the liquidity condition of the firm and this disables the firm to invest in the profitable projects and lower the profitability. Arnott and Asness (2003) finds that, better governed firm give more cash in dividend payout which also can be considered as firm performance. Moreover Bowen, Rajgopal, Venkatachalam (2008) found that, corporate governance also can be found from the accounting discretion, firm with weaker governance structure generally produce report with poorer future performance. According to Gompers, Ishii, and Metrick (2003), studying the impact of corporate governance on firm performance finds that, strong shareholders rights and returns of the firm outperform on risk-adjusted basis. This result indicates that corporate governance also can be measured or constructed from publicly available data. According to Klein, Shapiro and Young (2005), there are not any clear evidence that can suggest that better corporate governance will enhance the firm’s performance.

One alternative way to measure firm performance is measuring the performance of companies with shareholders rights. Core, Guay and Rusticus (2004) said that, in current decade share returns of companies are strongly related with shareholders right companies with poor shareholders rights do not over perform in their performance. The companies which maintain strong shareholders right may not exhibited superior return on their performance. On the other hand, if the firm’s risk adjustment not done properly, corporate governance may correlate with unrecognizable risk factor(s). One other thing is that the relation between corporate governance and firm performance might be increase distrust about causality explanation.

In most countries the common mechanism for determining collective action problems among shareholders partial ownership and control is given to the hand of large shareholders. In this situation two important form of corporate governance need to be considered by the firm: first, there may be conflict among the shareholders with management against small investors; and secondly, the liquidity from secondary market will decrease. To boost the liquidity crisis of the stock market corporate law is enforced and which limits the power of the large shareholders of the company and also limit the violence of the minority shareholders. In this system generally the firms depends on the board of directors to maintaining and functioning the actions of the shareholders. Sometimes the actions of the board of directors become ineffective. Where the minority shareholders get better protection the interest of the mangers also become an issue of prudence. Finally, the primary goal of the corporate governance is to control the regulation of activity the shareholders and managers and made a check and balance to protect the interest of both shareholders and mangers.

This paper will try to find out how corporate governance can help the firm to accelerate their performance. For doing so there lies a need for developing a measure to scale corporate governance practice of the firm and to allocate a governance score for each firm then calculation of the financial and economic performance by using governance score will become possible. This paper will also conduct a cross sectional analysis to relate firm’s performance with their corporate governance practices.

Keywords

Corporate Governance, Firm performance, Corporate Governance and Firm Performance.

Problem of the study

This paper will develop to find out the following problems:

How corporate governance impact on firm’s performance?

Why firm’s performance is influenced by corporate governance?

When corporate governance influence firm’s performance?

Aims

The aim of this paper is to find the influence of corporate governance over firm’s performance.

Objective of the study

This research will be conduct to fulfill the following objectives

To measure the industry wise corporate governance practices.

To find the impact of corporate governance with the firm performance.

To measure the degree of performance influenced by corporate governance.

To find out the major indicators of corporate governance.

To find out the best practices of corporate governance.

Literature Review

The concept corporate governance actu