Corporate governance is a process that engenders effective allocation of scarce resources within an economic unit in a manner that maximizes value creation for all its stakeholders—stockholders, credit providers, employees, customers, suppliers, the community at large, as well as the physical environment. One of the most influential and far-reaching international benchmarks for assessing the quality of corporate governance is the twice-revised G20/OECD “Principles of Corporate Governance” statement. Originally promulgated in 1999, and revamped in 2004, the multi-national model was revised during 2015 for the post-Great Recession period.
The significant underlying question about corporate governance models is whether “good governance” equates to good economic outcomes. The current research—part of a two-phase project—seeks to assess the financial benefits that entities (and their stakeholders) reap from implementation of sound corporate governance principles. In this project, both accretion to value and embedded capital cost reduction are considered for empirical testing. A sample of firms included in the Borsa Istanbul (BIST) Corporate Governance Index is used to test these two areas of interest. In the present study, a nonparametric rank association statistical paradigm is applied to surplus value developed from an intangibles valuation model. Later research will test the proposition that “good” corporate governance—i.e., higher order index values—is negatively associated with firms’ weighted average cost of capital.
The results of this research can be expected to contribute to the areas of both corporate management and financial analysis in a practical way. Managers are rewarded for performance. If better corporate governance is associated with better financial outcomes, management will reform governance practices accordingly. Investors assume risk to achieve specific return goals. They, too, can use (and impound in security prices) outcomes from a model showing connectedness between governance and profits.