The Impact of Corporate Governance Practices on Firms' Financial Performance: Evidence from Malaysian Companies

The impact on firm performance stemming from specific corporate practices and structures was analysed, based on data from seventy-seven Malaysian listed companies, over a four-year period from 1996 to 1999. Based on a combination of cross-sectional and time-series data, panel data regression techniques were used to analyse the performance of the firms, using both fixed effects and random effect models. Using return on equity as the dependent variable, it was established that the size of firm, the gearing ratio (i.e. scale of borrowing), and the proportion of shares held by institutional investors significantly influenced firm performance. The degree of impact on firm performance followed a quadratic fashion, with performance increasing with the size of the firm, up to an optimal size of RM8,839 million in turnover. Beyond that size, firm performance declined with increasing size. Borrowing had a negative effect on earnings, with a 1 per cent increase in borrowing having a 0.14 per cent decrease in the return on equity. Finally, the increased strength of institutional investors in a firm appeared to exert a positive influence on company earnings.