Sample Thesis Paper
Corporate governance practices in the U.K. have received increasing attention since the 1990s, with influential reports issued by the Cadbury Committee (1992), Greenbury Committee (1995), Hampel Committee (1998), and Turnbull Committee (2003) and Sir Derek Higgs (2003). These reports resulted in various corporate governance codes and recommendations, the most recent being the Combined Code on Corporate Governance, July 2003 (hereafter U.K. Code).
In this study, we use a scorecard developed by Standard & Poor’s to assess the corporate governance of U.K. listed companies. It provides a comprehensive measure of the extent to which a company has adopted international best practices in corporate governance, as disclosed in their corporate governance disclosures.
The evidence on whether there is a link between governance structure and performance remains weak. We argue that one possible reason could be due to the research methodology. Earlier research has examined subsets of governance mechanisms, usually one or two governance variables only. As the firms can choose and modify the structure of their governance system to suit their circumstances, we argue that we should examine a number of governance variables and over a longer time period.
Motivation of Study
Some of recent studies have used a broader measure of corporate governance through a composite corporate governance rating, including Gompers et al. (2003) for the U.S., Klapper and Love (2004) for fourteen emerging markets, Durnev and Kim (2002) for twenty seven countries, Bauer et al. (2003) for the EMU and the U.K.. These studies generally find a positive relationship between governance standards and firm value.
Baure et al. (2003) and other studies are based on ratings of one or two years only, assuming that governance ratings should remain constant for a number of years. However our data shows otherwise — there is a significant upward trend for the corporate governance scores over the time. Without time series data, researchers cannot study how firms adjust their governance structure over time, or analyze the causality between governance and firm performance found in Black et al. (2002). A recent study by Leora, Klapper and Love (2004) find that differences in firm-level contracting environment would affect a firm’s choice of governance mechanisms, in line with arguments put forth in Himmelberg et al. (1999). However with only one year data, they are not able to control the fixed effects and to test the causality.