The effects of corporate governance on financial performance and financial distress: evidence from Egypt

Abstract

Purpose

This paper aims to empirically examine the quality of corporate governance (CG) practices in Egyptian-listed companies and their impact on firm performance and financial distress in the context of an emerging market such as that of Egypt.

Design/methodology/approach

To assess the level of CG practices at a given firm, the current study constructs a corporate governance index (CGI) which consists of four dimensions: disclosure and transparency, composition of the board of directors, shareholders’ rights and investor relations and ownership and control structure. Based on a sample of 86 non-financial firms listed on the Egyptian Exchange, the effects of CG on performance and financial distress are assessed. Tobin’s Q is used to assess corporate performance. At the same time, the Altman Z-score is used as a financial distress indicator, as it measures financial distress inversely. The bigger the Z-score, the smaller the risk of financial distress.

Findings

The overall score of the CGI, on average, suggests that the quality of CG practices within Egyptian-listed firms is relatively low. The results do not support the positive association between CG practices and financial performance. In addition, there is an insignificant negative relationship between CG practices and the likelihood of financial distress. The current study also provides evidence that firm-specific characteristics could be useful as a first-pass screen in determining firm performance and the likelihood of financial distress.

Research limitations/implications

The sample size and time frame of our analysis are relatively small; some caution would be needed before generalizing the results to the entire population.

Practical implications

The findings may be of interest to those academic researchers, practitioners and regulators who are interested in discovering the quality of CG practices in a developing market such as that of Egypt and its impact on financial performance and financial distress.

Originality/value

This paper extends the existing literature, in the Egyptian context in particular, by examining firm performance and the risk of financial distress in relation to the level of CG mechanisms adopted.

Citation

Shahwan, T.M. (2015), "The effects of corporate governance on financial performance and financial distress: evidence from Egypt", Corporate Governance, Vol. 15 No. 5, pp. 641-662. https://doi.org/10.1108/CG-11-2014-0140