Strategy versus control orientation and firm performance: Evidence from Europe

Abstract

Objective: The objective of the article is to investigate the relationship between strategy and control in national-level corporate governance (CG) codes impact firm-level financial and strategic performance.

Research Design & Methods: We build on existing CG literature to offer a conceptual matrix showing the evolution of CG codes as they balance strategy and control. We relate the emphasis on strategy versus control at the national level to the firm level for both strategic outcomes as well as more traditional financial measures. Using Compustat data from 12 700 unique firms across 31 countries for the period 1990-2016, we estimate the impact of CG codes on various financial performance measures with multivariate regression and logistics (logit) models.

Findings: We find that there is a positive and significant relationship between higher emphasis on strategy in CG codes and return on assets (ROA). We also find a positive and significant relationship between the former and the probability of paying dividends, investing in research and development (R&D), and spending on capital expenditures (CAPEX).

Implications & Recommendations: Stronger legal institutions associate with a higher emphasis on strategy in CG codes. We suggest that policymakers should refine their CG Codes to focus more on strategy where feasible given our findings. We also recommend strengthening legal institutions, such as rule of law, as this will accelerate the evolution of CG codes from monitoring to strategy.

Contribution & Value Added: Our findings indicate that policymakers should refine their CG codes to emphasize strategy where feasible. In addition, strengthening legal institutions would accelerate the evolution of CG codes.

Keywords

Corporate Governance, Corporate Governance Codes, Strategy-Control Ratio, Firm performance, Institutions

Author Biography

Michael Troilo

Dr. Michael Troilo is the Chapman Chair and Professor of International Business at the University of Tulsa. His research interests include entrepreneurship and economic development, innovation, sustainability, business ethics, and the economics of the sports and tourism industries. He earned his PhD from the University of Michigan

Svetlana Orlova

Dr. Svetlana Orlova is an Associate Professor of Finance and International Business at the University of Tulsa. Her research interests include corporate finance and international finance. She earned her PhD at Oklahoma State University.

Miklos Stocker

Dr. Miklos Stocker is Habil. Associate Professor and Head of Institute at the Institute of Strategy and Management of Corvinus University of Budapest, Hungary. His research interests include strategy, business strategy, international new ventures, knowledge management, and sports strategy. He earned his PhD in Management and Business Administration at Corvinus University of Budapest.

Michal Zdziarski

Dr. Michal Zdziarski is an Associate Professor of Strategy and International Business in the Management Faculty at the University of Warsaw. His research interests include strategy, international business, corporate governance, sustainability, and business networks. He earned his PhD at the University of Warsaw.

References

1. Agrawal, A., & Knoeber, C. (2013). Corporate governance and firm performance. In C.R. Thomas & W.F. Shughart II (Eds.), Oxford Handbook in Managerial Economics (Chapter 26). New York: Oxford University Press. https://doi.org/10.1093/oxfordhb/9780199782956.013.0022
2. Agrawal, A., & Nasser, T. (2019). Blockholders on boards and CEO compensation, turnover, and firm valua-tion. Quarterly Journal of Finance, 9, 1-67. https://doi.org/10.1142/S2010139219500101
3. Aguilera, R.V., & Jackson, G. (2003). The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28, 447-465. https://doi.org/10.5465/amr.2003.10196772
4. Aguilera, R.V., & Cuervo-Cazurra, A. (2004). Codes of good governance worldwide: What is the trigger?. Or-ganization Studies, 25, 415-443. https://doi.org/10.1177/0170840604040669
5. Aguilera, R.V., Florackis, C., & Kim, H. (2016). Advancing the corporate governance research agenda. Corpo-rate Governance: An International Review, 24, 172-180. https://doi.org/10.1111/corg.12167
6. Almaskati, N., Bird, R., & Lu, Y. (2020). Corporate governance, institutions, markets, and social factors. Re-search in International Business and Finance, 51, 1-20. Retrieved from https://doi.org/10.1016/j.ribaf.2019.101089 on April 1, 2023.
7. Anokhin, S., Peck, S., & Wincent, J. (2016). Corporate venture capital: The role of governance factors. Journal of Business Research, 69, 4744-4749. https://doi.org/10.1016/j.jbusres.2016.04.024c
8. Bebchuk, L.A., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance?. Review of Financial Studies, 22, 783-827. https://doi.org/10.1093/rfs/hhn099
9. Bell, G., Filatotchev, I., & Aguilera, R.V. (2014). Corporate governance and investors’ perceptions of foreign IPO value: An institutional perspective. Academy of Management Journal, 57, 301-320. https://doi.org/10.5465/amj.2011.0146
10. Bezemer, P-J., Pugliese, A., Nicholson, G., & Zattoni, A. (2023). Toward a synthesis of the board-strategy relationship: A literature review and future research agenda. Corporate Governance: An International Review, 31, 178-197. https://doi.org/10.1111/corg.12481
11. Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of Corporate Finance, 14, 257-273. https://doi.org/10.1016/j.jcorpfin.2008.03.006
12. Bhagat, S., & Bolton, B. (2019). Corporate governance and firm performance. Journal of Corporate Finance, 58, 142-168. https://doi.org/10.1016/j.jcorpfin.2019.04.006
13. Bhagat, S., & Hubbard, G. (2022). Rule of law and purpose of the corporation. Corporate Governance: An International Review, 30, 10-26. https://doi.org/10.1111/corg.12374
14. Bharath, S., & Hertzel, M. (2019). External governance and debt structure. The Review of Financial Studies, 32, 3335-3365. https://doi.org/10.1093/rfs/hhy112
15. Boivie, S., Withers, M.C., Graffin, S.D., & Corley, K.G. (2021). Corporate directors’ implicit theories of roles and duties of boards. Strategic Management Journal, 42, 1662-1695. https://doi.org/10.1002/smj.3320
16. Bowen, H., & De Clercq, D. (2008). Institutional context and the allocation of entrepreneurial effort. Journal of International Business Studies, 39, 747-767. https://doi.org/10.1057/palgrave.jibs.8400343
17. Chu, W.K., Yang, N.T., & Yang, S.Y. (2016). Corporate governance impact on research and development. Jour-nal of Business Research, 69, 2239-2243. https://doi.org/10.1016/j.jbusres.2015.12.036
18. Cicon, J., Ferris, S., Kammel, A., & Noronha, G. (2012). European corporate governance: A the-matic analysis of national codes of governance. European Financial Management, 18, 620-648. https://doi.org/10.1111/j.1468-036X.2010.00542.x
19. Ciftci, I., Tatoglu, E., Wood, G., Demirbag, M., & Zaim, S. (2018). Corporate governance and firm performance in emerging markets: Evidence from Turkey. International Business Review, 28, 90-103. https://doi.org/10.1016/j.ibusrev.2018.08.004
20. Cuomo, F., Mallin, C., & Zattoni, A. (2016). Corporate governance codes: A review and research agenda. Corporate Governance: An International Review, 24, 222-241. https://doi.org/10.1111/corg.12148
21. Cumming, D., Filatotchev, I., Knill, A., Reeb, D.M., & Senbet, L. (2017). Law, finance, and the in-ternational mobility of corporate governance. Journal of International Business Studies, 48, 123-147. https://doi.org/10.1057/s41267-016-0063-7
22. Demsetz, H. (1983). The structure of ownership and the theory of the firm. Journal of Law and Economics, 26, 375-390. https://doi.org/10.1086/467041
23. De Witt, B. (2017). Strategy, an international perspective (6th ed). Cengage Learning.
24. Dharwadkar, R., George, G., & Brandes, P. (2000). Privatization in emerging economies: an agency theory perspective. Academy of Management Review, 25, 650-669. https://doi.org/10.5465/amr.2000.3363533
25. Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 117, 1-37. https://doi.org/10.1162/003355302753399436
26. Doidge, C., Andrew Karolyi, G., & Stultz, R. (2007). Why do countries matter so much for corporate govern-ance?. Journal of Financial Economics, 86, 1-39. https://doi.org/10.1016/j.jfineco.2006.09.002
27. Duchin, R., Matsusaka, J., & Ozbas, O. (2010). When are outside directors effective?. Journal of Financial Eco-nomics, 96, 195-214. https://doi.org/10.1016/j.jfineco.2009.12.004
28. Elshandidy, T., & Neri, L. (2015). Corporate governance, risk disclosure practices, and market liquidity: Com-parative evidence from the UK and Italy. Corporate Governance: An International Review, 23, 331-356. https://doi.org/10.1111/corg.12095
29. Filatotchev, I., & Wright, M. (2011). Agency perspective on corporate governance of multinational enterpris-es. Journal of Management Studies, 48, 471-486. https://doi.org/10.1111/j.1467-6486.2010.00921.x
30. Filatotchev, I., Jackson, G., & Nakajima, C. (2013). Corporate governance and national institutions: An emerging research agenda. Asia Pacific Journal of Management, 30, 965-986. https://doi.org/10.1007/s10490-012-9293-9
31. Forbes, D., & Milliken, F. (1999). Cognition and corporate governance: understanding boards of directors as strategic decision-making groups. Academy of Management Review, 24, 489-505. https://doi.org/10.5465/amr.1999.2202133
32. Fuenzalida, D., Mongut, S., Arteaga, J.R., & Erausquin, A. (2013). Good corporate governance: Does it pay in Peru?. Journal of Business Research, 66, 1759-1770. https://doi.org/10.1016/j.jbusres.2013.01.008
33. Geiler, P., & Renneboog, L. (2016). Executive remuneration and the payout decision. Corporate Governance: An International Review, 24, 42-63. https://doi.org/10.1111/corg.12127
34. Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Eco-nomics, 118, 107-155. https://doi.org/10.1162/00335530360535162
35. Gugler, K. (2003). Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment. Journal of Banking & Finance, 27, 1297-1321. https://doi.org/10.1016/S0378-4266(02)00258-3
36. Hillman, A.J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. The Academy of Management Review, 28, 383-396 https://doi.org/10.5465/amr.2003.10196729
37. Haxhi, I., & van Ees, H. (2010). Explaining diversity in the worldwide diffusion of codes of good governance. Journal of International Business Studies, 41, 710-726. https://doi.org/10.1057/jibs.2009.39
38. Haxhi, I., & Aguilera R.V. (2017). An institutional configurational approach to cross-national diversity in corporate governance. Journal of Management Studies, 54, 261-303. https://doi.org/10.1111/joms.12247
39. Hermes, N., Postma, T.J.B.M., & Zivkov, O. (2016). Corporate governance codes in the European Union Are they driven by external or domestic forces?. International Journal of Managerial Finance, 2, 280-301. https://doi.org/10.1108/17439130610705490
40. Honore, F., Munari, F., & de la Potterie, B. (2015). Corporate governance practices and companies’ R&D intensity: Evidence from European countries. Research Policy, 44, 533-543. https://doi.org/10.1016/j.respol.2014.10.016
41. Inci, A., Lee, B., & Suh, J. (2009). Capital investment and earnings: International evidence. Corporate Govern-ance: An International Review, 17, 526-545. https://doi.org/10.1111/j.1467-8683.2009.00749.x
42. Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360. https://doi.org/10.4324/9781315191157
43. La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54, 471-517. https://doi.org/10.1111/0022-1082.00115
44. Levie, J., & Autio, E. (2011). Regulatory burden, rule of law, and entry of strategic entrepreneurs: An interna-tional panel study. Journal of Management Studies, 48, 1392-1419. https://doi.org/10.1111/j.1467-6486.2010.01006.x
45. Martins, H., Schiehll, E., & Terra, P. (2017). Country-level governance quality, ownership concentration, and debt maturity: A comparative study of Brazil and Chile. Corporate Governance: An International Review, 25, 236-254. https://doi.org/10.1111/corg.12192
46. McCahery, J., Sautner, Z., & Starks, L. (2016). Behind the scenes: the corporate governance preferences of institutional investors. Journal of Finance, 71, 2905-2932. https://doi.org/10.1111/jofi.12393
47. Mansour, M., Al-Amosh, H., Alodat, A.Y., Khatib, S.F.A., & Saleh, M.W.A. (2022). The relationship between corporate governance quality and firm performance: The moderating role of capital structure. Sustaina-bility, 14. https://doi.org/10.3390/su141710525
48. McConnell, J., & Servaes, H. (1990). Additional evidence on ownership and equity value. Journal of Financial Economics, 27, 595-612. https://doi.org/10.1016/0304-405X(90)90069-C
49. Mertzanis, C., Ellili, N., Marashdeh, H., & Nobanee, H. (2023). Corporate governance, enforcement institu-tions, and corporate liquidity in the MENA region. International Journal of Emerging Markets, preprint. https://doi.org/10.1108/IJOEM-11-2021-1673
50. Monks, R.A.G., & Minow, N. (1995). Corporate Governance. Oxford: Basil Blackwell.
51. Morck, R., Shleifer, A., & Vishny, R. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293-315. https://doi.org/10.1016/0304-405X(88)90048-7
52. North, D. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge Univer-sity Press.
53. Obeitoh, O.O., Bulusson, M.A., & Yusuf, I. (2023). Board characteristics and firm performance: The moderat-ing role of board expertise. EuroMed Journal of Management, 5, 185-209. https://doi.org/10.1504/EMJM.2023.133609
54. Papke, L., & Wooldridge, J. (2008). Panel data methods for fractional response variables with an application to test pass rates. Journal of Econometrics, 145, 121-133. https://doi.org/10.1016/j.jeconom.2008.05.009
55. Peng, M.W. (2014). Global Strategic Management (3rd edition). South-Western Cengage Learning.
56. Pfeffer, J., & Salancik, G.R. (1978). The external control of organizations: A resource dependence perspective. New York: Harper & Row.
57. Pillai, R., & Al-Malkawi, H. (2018). On the relationship between corporate governance and firm performance: Evidence from GCC countries. Research in International Business and Finance, 44, 394-410. https://doi.org/10.1016/j.ribaf.2017.07.110
58. Pindado, J., de Queiroz, V., & de la Torre, C. (2015). How do country-level governance character-istics impact the relationship between R&D and firm value?. R&D Management, 45, 515-526. https://doi.org/10.1111/radm.12115
59. Pissarides, F., Singer, M., & Svejnar, J. (2003). Objectives and constraints of entrepreneurs: evidence from small and medium size enterprises in Russia and Bulgaria. Journal of Comparative Economics, 31, 503-531. https://doi.org/10.1016/S0147-5967(03)00054-4
60. Rajput, M., & Jhunjhunwala, S. (2019). Corporate governance and payout policy: Evidence from India. Corpo-rate Governance, 19, 1117-1132. https://doi.org/10.1108/CG-07-2018-0258
61. Renders, A., Gaeremynck, A., & Sercu, P. (2010). Corporate governance ratings and company performance: A cross-European study. Corporate Governance: An International Review, 18, 87-106. https://doi.org/10.1111/j.1467-8683.2010.00791.x
62. Rodrigues, R., Samagaio, A., & Felicio, T. (2020). Corporate governance and R&D investment by European listed companies. Journal of Business Research, 115, 289-295 https://doi.org/10.1016/j.jbusres.2019.11.070
63. Schiehll, E., Ahmadjian, C., & Filatotchev, I. (2014). National governance bundles perspective: Understanding the diversity of corporate governance practices at the firm and country levels. Corporate Governance: An International Review, 22, 179-184. https://doi.org/10.1111/corg.12067
64. Schiehll, E., & Martins, H. (2016). Cross-national governance research: A systematic review and assessment. Corporate Governance: An International Review, 24, 181-199. https://doi.org/10.1111/corg.12158
65. Seifert, B., & Gonenc, H. (2012). Creditor rights and R&D expenditures. Corporate Governance: An Interna-tional Review, 20, 3-20. https://doi.org/10.1111/j.1467-8683.2011.00881.x
66. Seitz, M., & Watzinger, M. (2017). Contract enforcement and R&D investment. Research Policy, 46, 182-195. https://doi.org/10.1016/j.respol.2016.09.015
67. Troilo, M. (2011). Legal institutions and high-growth aspiration entrepreneurship. Economic Systems, 35, 158-175. https://doi.org/10.1016/j.ecosys.2010.08.001
68. Tulung, J., & Ramdani, D. (2018). Independence, size, and performance of the board: An emerging market research. Corporate Ownership & Control, 15, 201-208. https://doi.org/10.22495/cocv15i2c1p6
69. Vafeas, N., & Vlittis, N. (2019). Board executive committees, board decisions, and firm value. Journal of Cor-porate Finance, 58, 43-63. https://doi.org/10.1016/j.jcorpfin.2019.04.010
70. Wooldridge, J. (2002). Econometric analysis of cross section and panel data. Boston, MA: MIT Press.
71. Yermack D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(1996), 185-211. https://doi.org/10.1016/0304-405X(95)00844-5