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The efficacy of principle‐based corporate governance practices and firm financial performance: An empirical investigation

Krishna Reddy (University of Waikato, Hamilton, New Zealand)
Stuart Locke (University of Waikato, Hamilton, New Zealand)
Frank Scrimgeour (University of Waikato, Hamilton, New Zealand)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 29 June 2010




This paper seeks to address the effect that principle‐based corporate governance practices have on the financial performance of large publicly‐listed companies. In 2004, the New Zealand Securities Commission (NZSC) promulgated nine high level principles and guidelines for all business entities with an aim of improving corporate governance practices and boosting investor confidence in the New Zealand capital market. This event provides a point for empirically testing companies' responses.


Panel data for the NZX top 50 companies over the period 1999‐2007 are analysed using ordinary least squares (OLS) and two stage least squares (2SLS) regression techniques to evaluate whether: those firms that were continuously compliant with the NZSC requirements perform better; and the firm performance post‐NZSC recommendations is better than pre‐NZSC recommendations. Tobin's Q, market‐to‐book (MB) and return on assets (ROA) metrics are used as dependent variables..


The findings indicate that large listed companies have universally adopted the Securities Commission recommendations, establishing subcommittees for audit and remuneration, and having a majority of non‐executive/independent directors on the board which, on average, have seven members. There is support for the view that the NZSC recommendations have had positive influence on firm performance measured by Tobin's Q, MB and ROA. The results show that the presence of a remuneration committee has had a positive influence on firm performance.

Research limitations/implications

This study provides empirical support for the corporate governance recommendations made by the NZSC in 2004, giving support to the principle‐based corporate governance practices to be adopted in New Zealand. The sequential testing of each NZSC recommendation provides a comprehensive picture of performance outcomes which has not been achieved in prior research. The interdependency issues are of interest and the correlation between recommendations provides useful insights.


This study offers insights for policy makers interested in adopting principle‐based corporate governance practices within their country. Within New Zealand, public policy developments and stock exchange listing requirements/regulatory issues with associated compliance burdens are better informed as a consequence of the research.



Reddy, K., Locke, S. and Scrimgeour, F. (2010), "The efficacy of principle‐based corporate governance practices and firm financial performance: An empirical investigation", International Journal of Managerial Finance, Vol. 6 No. 3, pp. 190-219.



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Copyright © 2010, Emerald Group Publishing Limited

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