Does economic freedom help or hurt the emerging markets? the moderating effect of economic freedom on the corporate governance - financial performance relationship: a cross-country study

Gün, Görkem
This study investigates the relationship between corporate governance and financial performance of firms from distinct perspectives. First, the governance-performance relationship is examined by using three different types of financial performance indicators, which include accounting-based, valuation-based, and market-based performance indicators. Second, the study examines the governance-performance relationship in the emerging economies., while a sample of G-7 economies is also used to provide a comparison between the emerging and the developed economies. Third, the moderating effect of economic freedom on the association between corporate governance and financial performance is examined. Using data from 27 countries (including 20 emerging economies and 7 developed economies), we find that corporate governance is positively associated with the accounting-based financial performance in the emerging economies. For the developed economies, there is a significantly positive association between corporate governance and valuation-based financial performance. Also, the moderating effect of economic freedom is significant on the governance-performance relationship. However, the moderation effect diminishes as the level of economic freedom rises. The findings indicate that corporate governance is an important determinant of financial performance. Also, the economic and legal environment, including economic liberties, has a crucial role in the effectiveness of corporate governance. The outcomes are important for both business professionals and governmental authorities since the sole efforts of managers are not sufficient for effective corporate governance practices. The governmental institutions and agents are also responsible for providing the optimal environment in order for firms to implement the best corporate governance practices.