Corporate IT Security Audit Compliance

Aecounting and Business Research. Vol. 39. No, 5, pp. 4 9 7 – 5 1 3 , 2009 497

On the relatíon between corporate
governance compliance and operating
performance
Heidi Vander Bauwhede

Abstract — Better corporate perfonnance has been cited as one of the main benefits of adopting good corporate govemance
structures within organisations. However, in contrast to theory, a prior European study (Bauer et al., 2004) reports evidence of
a negative relationship between corporate govemance and corporate performance. This study re-examines this relationship,
and reports evidence of a positive relationship between the extent of compliance with intemational best practices concerning
board structure and functioning and operating perfonnance when operating perfonnance is measured by the retum on assets
(ROA). This resuh is robust to controlling for the firms’ compliance with best practices in other govemance areas, and holds
for some other govemance dimensions, namely disclosure of corporate govemance and the range of takeover defences.
Further tests indicate that greater compliance with intemational best practices conceming board stmcture and functioning is
significantly associated with reporting less income from asset disposals and that studying a performance measure that
includes this item obscures the inherently positive relationship between operating perfonnance and the extent of compliance
with intemational best practices regarding board stmcture and functioning. The results provide some support for an often-
cited motivation for the adoption of good govemance practices, and provide explicit evidence that the measure of operating
perfonnance is cmcial in examining firm-level operating performance.

Keywords: corporate govemance; operating performance

1. Introduction
This paper examines the relationship between
corporate govemance compliance and operating
performance for a set of large listed European
companies. My focus is on compliance with
intemational best practice in corporate govemance.
Following Jensen (1993) and prior govemance
research, I hypothesise that greater compliance with
intemational corporate govemance best practices
and, more specifically, best practices conceming the
structure and functioning of the board, is associated
with better operating performance, ceteris paribus.

I investigate the relationship between corporate
govemance compliance and operating performance
for a sample of European companies in 2000-2001,
because, during that period, there remained consid-
erable variation in corporate govemance practices

(see Wójcik, 2006; Bauer et a l , 2008), notwith-
standing that there were pressures from, for
example, institutional investors or cross-listings to
comply with intemational corporate govemance
best practices and that in some countries local codes
were, de facto, mandatory.”‘^

The study focuses on operating performance, and
not stock market performance, in order to investi-
gate fiirther the result of a prior European study
(Bauer et al., 2004) on the relation between
compliance with best practices conceming corpor-
ate govemance and operating performance which
seems to conflict with both theory as well as prior
American results. More specifically, Bauer et al.
(2004) report evidence of a negative relationship
between ratings on the extent of compliance with
intemational best practices and firm operating

The author is at Maastricht University and at Ghent
University. She also has an affiliation to Katholieke
Universiteit Leuven. She gratefiilly acknowledges Ping-Sheng
Koh, Kevin McMeeking, Piet Sercu, Konstantinos
Stathopoulos, participants at the 2006 European Accounting
Association Annual Conference (Dublin, Ireland), the editor
and two anonymous reviewers for usefijl comments. She also
thanks Deminor for providing the govemance data. The usual
disclaimer applies.

Correspondence should be addressed to Dr Heidi Vander
Bauwhede, Maastricht University, Department of Accounting &
Information Management, P.O. Box 616, Maastricht, 6200 MD,
Netherlands.
E-mail: [email protected]

This paper was accepted for publication in July 2009.

‘ I refer to a study commissioned by the European commis-
sion (Weil et al., 2002) and to the website of the European
Corporate Govemance Institute (http://www.ecgi.org/codes/
all codes.php) for an overview of the corporate govemance
codes in the European Union. Intemational govemance codes
are, for example, those established by the Intemational
Corporate Govemance Network (ICGN), and the Organisation
for Economic Co-operation and Development (OECD).

^Some countries (such as the UK and Italy) required
companies to disclose whether they complied with a (national)
corporate govemance code under a ‘comply or explain’
approach. This approach requires firms to disclose whether
(and to what extent) they comply with a particular corporate
govemance code and, if they do not (fully) comply, to explain
why they do not comply.

498 ACCOUNTING AND BUSINESS RESEARCH

performance, whereas theory (Jensen, 1993), pre-
dicts a positive relationship^ and a prior American
study (Larcker et al., 2005) finds some (albeit weak)
evidence of a positive relationship. I primarily focus
on board structure and functioning, and not on other
dimensions of corporate governance (such as, for
example, rights and duties of shareholders and
range of takeover defences), because it is especially
the structure and functioning of the board that can
directly affect the operating efficiency and operat-
ing performance of a company. However, for
completeness, I also perform and report the results
of some additional analyses on the relation between
other dimensions of corporate governance and firm
operating performance.

I use a sample of European listed companies for
which a private rating agency issues a firm-level
rating of the extent of compliance with inter-
national best practices conceming board structure
and functioning. Results of univariate and multi-
variate tests indicate that the one-year ahead retum
on assets (ROA) increases in the extent of
compliance with intemational best practices con-
ceming board structure and functioning. Tests
show that the results are not affected by the
potential endogeneity of the extent of govemance
compliance. In addition, the results are robust to
controlling for the firms’ compliance with best
practices in other govemance areas, such as rights
and duties of shareholders and-range of takeover
defences, and to controlling for country-level
performance. Moreover, I also find a positive
relation between the extent of compliance with
recommendations in some other govemance
dimensions, more specifically disclosure on cor-
porate govemance and range of takeover defences,
and firm operating performance.

Further, additional analyses indicate that greater
compliance with intemational best practices con-
ceming board stmcture and fiinctioning is signifi-
cantly associated with reporting less income from
asset disposals and that studying a performance
measure that includes the income fi^om asset
disposals, such as the retum on equity (ROE) or
net profit margin (NPM) used by Bauer et al.
(2004), instead of a performance measure which is
not impacted by the income fi^om asset disposals,
such as the retum on assets (ROA), obscures the
inherently positive relationship between operating
performance and the extent of compliance with

^ Bauer et al. (2004) find indications of a positive relationship
between govemance ratings, and stock retums and firm value,
respectively.

intemational best practices regarding board struc-
ture and functioning.

This study contributes to the literature on the
relation between corporate govemance and corpor-
ate performance. A first contribution is that the
study reports a positive relation between the extent
of compliance with intemational best practices on
various govemance dimensions (board stmcture
and functioning, disclosure on corporate govem-
ance) and the operating performance of European
companies. A second contribution is that this study
reports evidence which indicates that the unex-
pected negative relationship between corporate
govemance compliance and operating performance
as reported by Bauer et al. (2004)̂ * is due to poorly-
govemed companies using the available discretion
over the timing of asset sales to cover up their
inherently lower operating performance. The key
difference between this study and that of Bauer et al.
(2004) is that the retum on assets is introduced as
the preferred measure of operating performance
because the income measure used in computing the
retum on assets, i.e. operating income, is less
influenced by discretionary items than the income
measure used to compute the retum on equity or net
profit margin, i.e. income before extraordinary
items. The retum on equity and net profit margin
are the performance measures used by Bauer et al.
(2004).

The remainder of the paper is organised as
follows. The next section develops the main
research hypothesis. Section 3 describes the sample
and data. Section 4 presents the empirical model.
Section 5 presents the empirical results. Section 6
concludes.

2. Hypothesis development
The various corporate govemance codes that have
been issued since the late 1990s oflen refer to better
performance as one of the key benefits of adopting
their corporate govemance recommendations. This
performance can be understood as better market
performance (i.e. higher stock retums or firm

Examples of other studies that have examined the relation
between govemance and perfomiance using samples from other
countries (for example, the US, Australia, and various Asian and
some (individual) European countries), and using and focusing
on a variety of govemance attributes and performance measures,
are: Larcker et al. (2006), Black et al. (2006), Brown and Caylor
(2006a), Brown and Caylor (2006b), Dumev and Kim (2005),
Larcker et al. (2005), Alves and Mendes (2004), Bebchuk et al.
(2004), Klapper and Love (2004), Drobetz et al. (2004), Kiel
and Nicholson (2003), Bhagat and Black (2002), Yermack
(1996), and Klein (1998).

Vol. 39, No. 5. 2009 499

value)^ or as better operating performance. The
expected relationship between compliance with
corporate govemance recommendations and oper-
ating performance is based on the argument that
firms with a better govemance structure operate
more efficiently which increases their operating
performance (see, for example, Jensen, 1993).
However, results of previous studies on the relation
between govemance and operating performance are
mixed. Larckeret al. (2005), for example, find some
evidence of a positive relationship between an
overall govemance metric (The Corporate Library
Board Effectiveness Rating) and the one-year ahead
ROA for a set of large listed American companies.
By contrast, Bauer et al. (2004) find a negative
relationship between an overall govemance score
and operating performance for large European
companies.

As with any govemance study, a crucial element
in examining the relationship between govemance
and performance is how one defines and measures
‘better govemance’. In this study, I use a rating,
issued by a private rating agency (Deminor rating),^
that assesses the extent to which large listed
European firms comply with intemational best
practices conceming corporate govemance and,
more specifically, the extent to which firms comply
with intemational best practices conceming board
structure and functioning.^ Higher compliance is
implicitly assumed to be better govemance.
However, this is not necessarily true. A first reason
is that European companies may have adopted
govemance mechanisms and practices that differ
from the intemationally accepted best practices, but
are better tailored to the specific context in which
they operate. However, it is probably also true that

^ Examples of studies that have examined aspects of corpor-
ate govemance and market performance in an American setting
are Yemack (1996), Bhagat and Black (2002), Gompers et al.
(2003) and Bebchuk et al. (2004). Beiner et al. (2006), Alves
and Mendes (2004), Drobetz et al. (2004) and Kiel and
Nicholson (2003) are examples of govemance-market perform-
ance studies using samples of Swiss, Portuguese, German and
Australian companies, respectively.

* In Section 3,1 provide more detail on the rating.
‘ M o s t govemance studies use either a single indicator of

govemance, or an ‘arbitrary’ index. Larcker et al. (2006) argue
that measurement error in these govemance metrics may be
partly responsible for the mixed results on the association
between tiie typical measures of corporate govemance and
accounting and economic outcomes. Nevertheless, I prefer to
use the ratings issued by an independent rating agency as
measures of govemance compliance since these are publicly
available and easily accessible for market participants. The aim
of the study is to see whether these publicly available measures
of the extent of compliance with intemational best practices are
related to fiiture operating performance and can as such signal
future operating performance to market participants, who can, in
tum, use this infonnation for decision making.

there is less need for govemanee practices tailored
to local contexts for the largest companies in
Europe, which operate globally instead of locally.
Whether large listed European companies benefit
fi-om compliance with intemational best practices,
and then specifically in terms of higher operating
performance, is ultimately an empirical question.
Another reason why higher compliance is not
necessarily better govemance is that the best
practices identified by Deminor are not always
unequivocally related to better govemance. For
example, evidence on whether CEO duality is bad
govemance and board diversity is good govemance,
is mixed (see, for example, Sonnenfeld, 2004;
Massa and Simonov, 2007).* In order to refine the
analysis I focus on the dimension of corporate
govemance which is particularly likely to directly
infiuence operating efficiency and operating per-
formance, i.e. the structure and functioning of the
board of directors.^ As Jensen (1993: 862-863) puts
it, ‘The board, as the apex of the intemal control
system, has the final responsibility for the function-
ing of the firm. Most importantly, it sets the rules of
the game for the CEO. The job of the board is to
hire, fire, and compensate the CEO, and to provide
high-level counsel’ and ‘ . . . the very purpose of the
intemal control mechanism is to provide an early
waming system to put the organisation back on
track before difficulties reach a crisis stage.’ Jensen
(1993) then also attributes the weak corporate
performance from the early 1990s to problems with
the intemal control activity (Jensen, 1993: 352) in
the 1980s, which, in tum, stemmed from problems
with the board of directors (Jensen, 1993: 862).

The major threat to a well-functioning board, and
strong operating performance, is that the board is
dominated by managers (especially in Anglo-Saxon
countries) or majority shareholders (especially in
continental European countries) who act in their
ovra interest (instead of in the interest of all
stakeholders), and cover up any underperformance
by eamings management or manipulation to
appease (minority) shareholders. Jensen (1993:
869) then also recognises that characteristics such
as, for example, high-equity ownership by man-
agers and board members, a small board, not many
insiders on the board, and a CEO which is not the
chairman of the board, are key elements of a well-
functioning govemance system, which limits self-
interested behaviour by managers, uncovers bad
performance in time and takes the necessary actions

* I thank one of the anonymous reviewers for this observation.
‘ For completeness, I later expand the analyses to govemance

dimensions other than board structure and fiinctioning. The
results are reported in Section 5.4.

500 ACCOUNTING AND BUSINESS RESEARCH

to ‘put the organisation back on track’ (Jensen,
1993: 863). These key elements of a well-function-
ing board mentioned by Jensen (1993) are all
covered by the intemational best practices concem-
ing board structure and functioning. Therefore, I
expect that higher compliance with intemational
best practices conceming board structure and
functioning is related to better operating perform-
ance.

Although greater compliance with intemational
best practices conceming rights and duties of
shareholders and range of takeover defences may
increase the pressure by investors and the market for
corporate control on companies to perform well, it is
less straightforward that this greater compliance
with intemational best practices conceming rights
and duties of shareholders and range of takeover
defences is per se related to better underlying
operating performance, for in the absence of a well-
functioning board, managers and majority share-
holders could still act in their own self-interest,
underperform, and cover up weak performance by
eamings management or manipulation.'””’ This
leads to the following hypothesis:
HI: A company’s operating performance increases

in the extent of compliance with intemational
best practices conceming board stmcture and
functioning, ceteris paribus.

3. Sample and data
This study uses ratings of compliance with inter-
national best practices regarding board stmcture and
functioning which are supplied by a private rating
agency, Deminor Rating. Deminor Rating (a sub-
sidiary of Deminor Intemational) releases, since
March 2001, corporate govemance ratings on the
companies of the FTSE Eurotop 300 index.’^”^ The
ratings are based on over 300 corporate govemance
indicators, which were identified after consulting

‘ ” D e Angelo (1988), for example, reports that, during an
election campaign, managers exercise accounting discretion to
portray a favourable eamings picture to voters.

As concems disclosure on corporate govemance, it is
straightforward that mere disclosure per se cannot improve the
operating performance of a company. However, the level of
disclosure is highly positively correlated with the quality of the
structure and the fiinctioning of the board: companies with well-
structured and -functioning boards have no problem in disclos-
ing this information, while companies with badly-structured and
-functioning boards are less transparent about this. A positive
association between high disclosure and good operating
performance is then probably also due to a well-structured and
well-functioning board than to the level of disclosure per se.

‘^On 25 May 2005, Deminor announced that it had sold its
corporate govemance unit Deminor Rating to Institutional
Shareholder Services (ISS).

‘^ Some other studies that have used Deminor data are Bauer
et al. (2008), Bauer et al. (2006), Wójcik (2006), Wójcik et al.
(2005), and Bauer et al. (2004).

institutional investors. The indicators can be div-
ided into four categories: rights and duties of
shareholders, range of takeover defences, disclosure
on corporate govemance and board stmcture and
functioning. Deminor Rating issues a rating of each
one of the four categories. This study focuses on the
rating regarding board stmcture and functioning.
This rating covers indicators on the election of
members of the company’s bodies, composition of
the board, functioning of the board, remuneration of
the company’s bodies and committees of the board.

Ratings are assigned by senior analysts from the
different European offices of Deminor after all the
most recent publicly available information on a
particular company (i.e. not only financial reports,
but also articles of association, agendas, resolutions
and minutes of ordinary and extra-ordinary general
meetings, investor’s handbooks and newsletters,
intemet-sites and all other publicly available infor-
mation) has been benchmarked against the best
practice found in intemationally accepted stand-
ards. Those intemationally accepted standards are
established by, for example, the Intemational
Corporate Govemance Network (ICGN) and the
Organisation for Economic Co-operation and
Development (OECD). A rating is measured on a
scale of 5 to 1, with 5 representing the best practice
(Deminor Rating, 2001: 9-10).

The sample studied in this paper consists of all
companies from the FTSE Eurotop 300 for which
there is a Deminor rating of board structure and
functioning for the year 2000 and/ or 2001, as well
as complete infonnation on the other variables in
the model.'”* I exclude financial companies (FTSE
industry sector code 80) because their financial
stmcture is distinct from other companies and they
are often subject to special mies and recommenda-
tions. I delete observations with extreme observa-
tions (i.e. values outside the 5* and 95* percentile)
for the ratios in the model, namely leverage and the
three measures of operating performance (i.e. ROA,
ROE and NPM), for ratios easily take on extreme
values. The final sample exists of 201 firm-year
observations (from 118 different companies).
Table 1, Panels A and B give a breakdown of the
observations by industry sector and by country,
respectively.

I obtain financial statement data from
Worldscope.

‘ ‘ ‘ T h e item that is most frequently missing is the Deminor
govemance rating. This rating is missing because not all FTSE
Eurotop 300 firms are followed by Deminor.

Vol. 39, No. 5. 2009 501

Table 1
Sample description
Panel A: Breakdown of sample by industry*

Industry code

4
7
11
13
15
21
24
25
26
31
34
41
43
44
47
48
49
52
53
54
58
59
63
67
72
73
78
93
97

Industry description

Mining
Oil & Gas
Chemicals
Construction & Building Materials
Forestry & Paper
Aerospace
Diversified Industrials
Electronic & Equipment
Engineering and Machinery
Automobiles
Household Goods & Textiles
Beverages
Food Producers & Processors
Health

Number of firms % Number of firm-years

Personal Care & Household Products
Pharmaceuticals
Tobacco
General Retailers
Leisure, Entertainment & Hotels
Media & Photography
Support Services
Transport
Food & Dñig Retailers
Telecommunication Services
Electricity
Gas Distribution
Water
Information Technology Hardware
Software & Computer Services
Total

* Following the FTSE Global Classification System.

Panel B: Breakdown of sample by country”*

Country

Belgium
France
Italy

2
6
9
6
1
3
3
7
7
8
4
2
4
1
2
4
2
7
2
9
3
1
4
6
8
2
1
2
2

118

Number of firms % Number of firm-years

3 2.54
25 21.19
6 5.08

The Netherlands 8 6.78
Portugal
Spain
Switzerland
Germany
Denmark
Norway
Sweden
Finland
Ireland
UK
Total

1 0.85
7 5.93
7 5.93

12 10.17
2 1.69
1 0.85
8 6.78
1 0.85
1 0.85

36 30.51
tl8 100

** All but two countries in the sample (Switzerland
other countries
and Monetary

, but the UK, Denmark and Sweden
Union).

6
49
10
13

1
13
13
21

3
2

12
2
2

54
201

and Norway)
are part of the

1.69
5.08
7.63
5.08
0.85
2.54
2.54
5.93
5.93
6.78
3.39
1.69
3.39
0.85
1.69
3.39
1.69
5.93
1.69
7.63
2.54
0.85
3.39
5.08
6.78
1.69
0.85
1.69
1.69
100

%

2.99
24.38
4.98
6.47
0.50
6.47
6.47

10.45
1.49
1.00
5.97
1.00
1.00

26.87
100

are member of the
Eurozone or EMU

3
10
15
11
2
5
4

12
12
16
8
4
7
1
3
8
4

11
3

15
5
1
8
8

14
4
1
3
3

201

%

1.49
4.98
7.46
5.47
1.00
2.49
1.99
5.97
5.97
7.96
3.98
1.99
3.48
0.50
1.49
3.98
1.99
5.48
1.49
7.46
2.49
0.50
3.98
3.98
6.97
1.99
0.50
1.49
1.49
100

European Union. All
(i.e. Europe’s European

502 ACCOUNTING AND BUSINESS RESEARCH

4. Research design and model specification
I test the relationship between the extent of
compliance with intemational best practices con-
ceming corporate govemance, and more specific-
ally board structure and functioning, and the
operating performance of large listed European
companies by estimating the following operating
performance model:

Performancei, = ßo + iS|CG.COMPi,

where:

i, +

(1)

Performanceit = ROA, where: ROA is one-year
ahead retum on assets for firm i in
year t;

CGCOMPLit = a rating proxying for the extent of
compliance with intemational
best practices regarding board
structure and functioning for
firm i in year t;

= leverage, as measured by the sum
of short-term and long-term debt
divided by total assets, for firm i in
year t;

= the natural logarithm of total
assets for firm i in year t;’^”^

Y2001it = indicator variable which takes one
if the observation is from 2001,
and zero if the observation is from
2000;

Xjt = a vector of industry dummies, i.e.
indicator variables for the (two-
digit) industry codes of the FTSE
Global Classification system.

I measure the dependent variable in the operating
performance model, i.e. one-year ahead firm-level
operating performance, by the one-year ahead
ROA. I use the one-year ahead, instead of the
contemporaneous, ROA to make sure that the
govemance systems described by the ratings are
in place and operational at the moment that I start
measuring operating perfonnance. Consistent with
prior studies (e.g. Larcker et al., 2006), ROA is
measured as operating income divided by average
total assets.’^ For comparison, I also perform

‘^ Total assets are measured in thousands of Euros. Values
initially stated in a local currency are converted to Euros by
using the exchange rate at the balance sheet date.

I use the natural logarithm because I do not expect a linear
relationship between operating performance and firm size.

” T h e average is computed as the sum of the value at the
beginning of the accounting period and the value at the end of
the accounting period, divided by two.

analyses in which I replace the one-year ahead
ROA with the one-year ahead ROE and the one-year
ahead NPM, because the ROE and the NPM were
used as performance measures in the study by Bauer
et al. (2004). The ROE is measured as eamings
before extraordinary items dividend by the average
book value of stockholders’ equity, and net profit
margin is the ratio of eamings before extraordinary
items divided by sales (see, for example, Gompers
et al., 2003). As argued by Core et al. (2006) and
Barber and Lyon (1996), the ROA is clearly the
preferred measure of operating performance
because it is less affected by discretionary items
than the ROE and the NPM. This implies that I
expect a stronger relationship between the extent of
compliance with intemational best practices con-
ceming board stmcture and functioning and the
one-year ahead ROA, than between the extent of
compliance and the one-year ahead ROE or the one-
year ahead NPM. I will further refer to the three
models as the ROA model, the ROE model and the
NPM model.

The test variable is a measure of the level of
compliance with intemational best practices con-
ceming corporate govemance, and more specific-
ally best practices conceming board stmcture and
fiinctioning (CG COMPL). CG COMPL is prox-
ied by Deminor’s rating of board stmcture and
functioning. The rating takes a value from 1 to 5
with 5 indicating the highest compliance with
intemational best practice. A positive sign on
CG_COMPL indicates that greater compliance
with best practices conceming board structure and
fimctioning is related to better operating perform-
ance, and is consistent with the hypothesis. I further
include in the regression leverage (LEV), computed
as the sum of short-term and long-term debt over
total assets, to control for the well-known impact of
leverage on ROE, the natural logarithm of total
assets (LNTA) as a measure of firm size, a year
dummy (Y2001) to control for the impact of the
general macro-economic context on individual firm
performance, and a vector of industry dummies.

5. Descriptive statistics and results
5.1. Descriptive statistics
Table 2, Panel A, presents descriptive statistics for
the dependent and independent variables of the
operating performance model. Table 2, Panel A,
shows that the mean one-year ahead ROA is about
6.6% (median 6.4%). The mean one-year ahead
ROE is higher, and about 7.3% (median 10.2%).
The mean one-year ahead NPM amounts to 2.9%
(median 3.7%). Mean and median leverage is about
28%.

Vol. 39, No. 5. 2009 503

Table 2
Descriptive statistics and correlations^
Panel A: Descriptive statistics

Variable

ROA
ROE
NPM
LEV
LNTA

Panel B:

201
201
201
201
201

Mean

0.0658
0.0729
0.0289
0.2773

16.5757

StdDev

0.0482
0.1507
0.0769
0.1135
1.0492

Min.

-0.0352
-0.5838
-0.4580

0.0470
13.7591

Pearson correlation coefficients

ROA
ROE
NPM
CG COMPL
LEV
LNTA

ROA

1.0000
0.5095
0.5224
0.1823

-0.1993
-0.4028

ROE

0.8328
0.0271

-0.1724
-0.1337

NPM

0.0190
-0.1640
-0.2297

0.0314
0.0433
0.0110
0.1868

15.8908

Median Q3

0.0635 0.0946
0.1019 0.1588
0.0365 0.0684
0.2794 0.3642

16.3970 17.2708

CG COMPL LEV LNTA

Max.

0.1966
0.3015
0.1626
0.4955

19.1507

1

-0.0092 1.0000
-0.0273 0.2066 1.0000

* Variable definitions:

ROA = one-year ahead return on assets for firm i in year t, and is measured as operating
income divided by average total assets,

ROE = one-year ahead retum on equity for firm i in year t, and is measured as eamings
before extraordinary items divided by the average book value of stockholders’
equity,

NPM = one-year ahead net profit margin for firm i in year t, and is measured as eamings
before extraordinary items divided by sales revenues

LEV = ratio of short-term debt plus long-term debt over total assets for firm i in year t
LNTA = natural logarithm of total assets for firm i in year t
CG_COMPL = score fi^om 1 to 5 with higher scores indicating greater compliance of firm i in year t

with intemational best practice conceming board stmcture and fiinctioning

Table 2, Panel B, presents the Pearson …

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