Doubling independent directors and firm performance: evidence from Bangladesh

This paper investigates how increased board independence influences the operational performance of firms within the context of corporate governance reforms in Bangladesh, which is an emerging economy.

The research utilized a panel dataset involving 183 non-financial companies listed on the Dhaka Stock Exchange, covering the period from 2007 to 2017.

To address potential endogeneity issues in the governance-performance relationship, the system generalized method of moments (SGMM) estimation technique was employed.

The results from the policy evaluation using difference-in-difference (DID) estimation indicate that the regulatory change, which included doubling the proportion of independent directors, enhances firm performance.

It shows that the previously negative significance of board independence during the pre-reform period diminishes following the code modification phase.

Additionally, the study finds that the regulatory change results in significant variations in how internal governance factors affect performance in both small and large firms.

The results imply that while the policy change establishes the board’s role in resource provision, the complete monitoring capacity necessary for enhancing firm performance has not yet been fully realized.

This research adds to the limited literature on the relationship between corporate governance reforms and firm performance in a developing country.

The findings highlight concerns about the effectiveness of applying agency perspectives universally across different nations.