Good Corporate Governance Practice Is Beneficial For Firms, Its Stakeholders And Whole Economy

1282 WordsNov 10, 20146 Pages
• It is well established that good corporate governance practice is beneficial for firms, its stakeholders and whole economy. Further based on studies such as by Levine (2004), saving rates, investment decisions, technological progress and consequently economic growth are encouraged as financial systems reduce market frictions. So developing countries require reforms to stimulate financial system for revival of economy. • This will enable financial institutions and markets to better execute their important function that is to monitor investments and exert corporate governance. Their control can compel firms to pursue activities which generate higher value and retain investor’s confidence which is essential for continuous flow of capital…show more content…
In early developmental stage of economy FI’s are more influential in exerting corporate governance as compared to the markets (Levine, 2002). Firms mostly rely on internal funding sources but prefer to seek banks for capital financing rather than markets and therefore banks gain an advantage to exert corporate governance over borrowers (Gorton and Winton, 2002). • Better governance can be exercised by making prudent investment decisions by FI’s. They are required to make adequate due diligence of investee by assessing its past performance, feasibility analysis and management quality which enables effective allocation of the limited savings (Yuan et al, 2006). The same research paper also stated number of reasons for FI’s inability to affect governance which included weak legal environment, inadequate disclosures, conflict of interest, monitoring cost, etc but higher state ownership is most significant constraint. • FI’s with large shareholdings are better apt at influencing the performance of investee firms in their portfolios by being a quasi insider and creating knowledge advantage using private information gained through regular meetings (Holland, 1999). Through cooperative means FI’s are able to probe, monitor and direct the corporate strategies, management and financial performance without direct intervention. Private and informal influencing is favored to public interventions as it may affect reputation of all parties involved.
Open Document