Hypotheses Development
The past studies Wellalage & Locke (2013) were also proved that there is a negative effect of the Board Size and Board Meeting on the financial performance. There is negative relationship with Board Size, Board Meeting Frequency on bank performance. Previous research on internal corporate governance studied at several characteristics of the board of directors, such as its size, independence, structure, activity, and remuneration, to determine how this affected performance. As a result, the size of the board of directors might be a significant governance factor. For excellent corporate governance and company success, the appropriate size of the board of directors should be determined. As a result, the build hypothesis is as follows:
Board Size: Other research, contrary to the outcomes of these investigations, have advocated for a large board size. According to Fitriya Fauzi1 and Stuart Locke (2012), a larger board of directors is more likely to have a diverse set of expertise and abilities. They can provide excellent advice and perspectives on how to improve a company’s success. As a result, they support expanding the board of directors in order to take full advantage of diversity. As empirical evidence of the Malaysian Stock Market’s theoretical underpinnings, researchers discovered a negative association between firm performance and board size (Haniffa & Hudaib, 2006). Because of these confusing findings, the following hypotheses can be made:
H1: – Board Size (BSz) has a significant impact on ROE.
Board Meeting Frequency :The board meeting was discovered to have no link to the firm’s performance (Bhatt & Bhattacharya, 2015). Further research reveals a significant non-monotonic relationship between corporate board meeting frequency and firm performance, implying that either a small or large number of corporate board meetings has a favorable influence on corporate performance (Ntima & Kofi A. Ose,2013).
H2: – Board Meeting Frequency (BMF) has a significant impact on ROE.
Audit committee size : According to Romano et al. (2012), the size of the audit committee has no impact on the firm’s performance. On the one hand, Tornyeva & Wereko (2012) argue that the size of the audit committee influences the firm’s performance improvement, and they establish a substantial positive association between the audit committee’s size and the firm’s performance. The explanation for this might be that a larger audit committee with a diverse range of experience and expertise improves the efficacy of the committee’s monitoring role, resulting in improved business performance. According to Al-Matari et al. (2012), the size of the audit committee (ACS) has a substantial negative link with firm performance. As a result,the size of the audit committee may have a significant impact or not on the firm’s performance. This study assumes that, based on these perspectives,
H3: – Audit committee size (ACS) has a significant impact on ROE.
Director Ownership: The presence of a director has a significant and positive influence on the performance of both accounting and market-based enterprises, according to(Rashid, 2020). Bhagat et al. (2008) published a study that emphasizes the importance of common stock owned by corporate board members (director ownership) in the present corporate governance discussion. They identify significant positive relationship between total director ownership and financial performance as well as effective management supervision.
H4: – Director Ownership (DO) has a significant impact on ROE.
Outside Directorship: Outside directorship is linked to improved firm performance (Gupta et al., 2008). Ahmed Sheikh et al. (2013) found that the performance of the company is negatively affected by the outside director. The negative relationship might be due to the low presence of independent directors on the boards of Pakistani companies, which could encourage managers to expropriate the company’s resources for personal gain, lowering performance.
H5: – Outside Directorship (OD) has a significant impact on ROE.
3.1 Operationalization
3.1.1 Dependent Variable (Firm Performance)
In this study, one dependent variable was examined: return on equity (ROE). The various type of empirical studies uses financial measures to test the relationship between corporate governance and financial performance. Those measures are accounting measures and market measures (Hamdan & Ahmed, 2015). Accounting measures such ROE Haider et al., (2015) and ROA Naimah, (2017) are the most common variables used in past corporate governance researchers. Financial Performance: One of the most important and widely used financial profitability statistics is ROE. In their investigations, several researchers have used ROE as a reliable performance indicator. The return on equity (ROE) is an essential statistic since it shows how the company has utilized its owners’ resources. This ratio shows the degree to which the goal of maximizing of shareholder wealth has been met. The ROE measures the financial Performance by firm profitability. As a percentage of shareholders’ equity, the amount of net income returned. Return on equity is a metric for determining a company’s profitability by disclosing how much profit it earns with the money invested by shareholders. The return on equity (ROE) of each company has been gathered for its annual reports. ROE is computed as Net Income/Equity Shareholder’s * 100 and given as a percentage. Before any dividends are paid to ordinary stockholders, but after dividends are paid to preferred stockholders, net income is calculated for the whole fiscal year. Preferred shares are not included in a shareholder’s equity calculation. Operational Performance: ROA use to determining how profitable a firm is. A study was conducted by Naimah, (2017) to determine the effect corporate governance mechanism and Corporate Governance Perception Index (CGPI).
3.1.2 Independent Variable
The independent variables consist of five corporate governance variables.
Board Size
The number of directors on a board is determined by this variable. When a board develops too large, it becomes difficult to control, encourages free-riding, and creates issues. Smaller boards, on the other hand, minimize the likelihood of free riding and raise individual director accountability.
Board meeting frequency
Board meeting frequency has substantial governance implications since it is less expensive to vary the frequency of board meetings to improve the firm’s governance than to change the board’s membership or ownership structure. Attain to better governance can adjust board meeting frequency than to changing the ownership structure.
- Audit committee size
Audit committees are a subcommittee of the company’s board of directors. It is a critical corporate governance mechanism with the goal of improving the company’s financial information’s reliability and integrity, as well as increasing public trust in the financial statements. The Cadbury committee proposed that one of the committees with oversight responsibilities over management in the compilation of financial statements be the audit committee. The audit committee must be composed entirely of non-executive directors and have a minimum of three members in order to maintain its independence. The establishment of an audit committee would improve financial performance (Tornyeva & Wereko, 2012).
- Director Ownership
In this study, director ownership refers to the percentage of the total firm shares outstanding in a given year that are owned by the directors. As an useful variable for analyzing alignment of interests between owners and management, director ownership covers both executive and non-executive directors.
- Outside Directorship
A member of a company’s board of directors who is not an employee or a shareholder is known as an outside director. An annual retainer fee is provided to outside directors in the form of cash, incentives, and/or stock options.
3.1.3 Control variable
Buallay et al. (2017) analyzed the171 listed companies in Saudi Arabia and in order to measure the relationship between corporate governance and firm performance, the study used five control variables such as Auditing quality, Auditing quality, Board of directors Size, firm age and firm size as control variables. . Peters & Bagshaw (2014) analyzed the listed firms in Nigeria and this study used firm age and firm size as control variables. Naimah (2017) analyzed the samples are companies that followed the Corporate Governance Perception Index award and found that Leverage and firm size have negative effects on profitability.
Four control variables will be discussed in this study. They are: firm Size, firm age, leverage and, firm Growth. In order to control the firm-specific features that may impact firm performance, various control variables such as leverage and firm size were added in the estimate model.
Firm size
Because larger organizations often have greater market power, firm size is measured by the number of employees. As a result, performance is assumed to be positively connected to company size. Because they have less market experience, are in the process of building up their market position, and often have greater capital expenses than older organizations, younger enterprises are projected to have lower profitability than older firms. The existence of a positive relationship between firm size and performance suggests that large firms benefit from scale economies, which in turn improve performance (Ahmed Sheikh et al., 2013).
Leverage
Due to financing expenses and the danger of default, a company’s debt level has the ability to affect financial performance. The amount of debt produced when shareholders borrow money to invest in securities is referred to as firm leverage. The negative relationship between leverage and performance suggests that agency issues may cause firms to use higher-than-appropriate levels of debt in their capital structure, increasing a lender’s influence and potentially limiting managers’ ability to be creative and innovative, which is critical for a firm to thrive and succeed.
Firm Age
The total number of years a business has been in existence is referred to as the firm’s age. According to Peters & Bagshaw (2014), age has an influence on both financial growth and company capital structure. Firms often have higher expenses in the start of their operations. Because they are new to the market with less experience. As a result, new enterprises’ overall cost structure is greater than that of existing firms.
Firm Growth
When a firm grows in size, it is generally evaluated in terms of sales, employment, profitability, or value-added. As a company develops into new areas, it encounters new challenges and faces some uncertainty.
