Corporate governance award and performance of Indonesian LQ45 firms

This research aims to examine the impact of CGPI award on firm’s operational performance. Contrary to our expectation, using a sample of 45 companies listed in LQ45 index during 3-year observation period, it is found that corporate governance award has a significant negative relationship with companies’ performance. We use CGPI awardee/non-awardee to represent corporate governance award and ROA as a proxy of firm performance. Control variables included in this research consist of independent commissioners’ independency, board of director size and firm size. The unexpected negative relationship might indicate that the additional costs that must be borne by companies to implement good corporate governance practices, eventually become disadvantageous to their operational performance. The similar conclusion is found for the longer-term performance. Furthermore, we also find that the average ROA of CGPI awardees is much lower than the non-awardees, arguably due to the costly efforts put forward by the awardees to carry out and report on their corporate governance practices. The result of this research confirms the stewardship theory, in which the awardees put management as a steward and govern the firms to grow in size, however it comes with a certain cost that reduces their profitability.

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