Article Title

Corporate Governance Provisions and Risk-Adjusted Performance in the U.S. Restaurant Industry

Type of Submission

AHFME Symposium Abstract


There is a growing awareness that corporate governance variables play an important role in firm performance. While the majority of researchers argue that firm performance is positively associated with corporate governance structure, some other scholars suggest that there is no link between corporate governance/shareholder rights and firm performance. In order to test the effect of corporate governance on firm performance we included 35 publicly-traded restaurant firms in our study. In order to find the effects of the shareholders’ rights on firm performance we employ the G-Index score developed by Gompers et al. (2003) and retrieved data between 1990 and 2006. Normally, the G-index score ranges between 0 and 24. However, in our study, it ranged between 3 and 13. As a result, companies which had a G-index of 8 or lower were classified as “democratic” governance firms. On the other hand, companies with a G-index of 9 or higher were placed into “moderate” governance firms category. That is, no “dictatorship” firms existed as per definition of Gompers et al. (2003). The dependent variable (firm performance) was measured by Return on Assets (ROA), Return on Equity (ROE), Operating Cash Flows (OCF) and five risk-adjusted performance measures (Sharpe Ratio, Treynor Ratio, Jensen Index, Sortino Ratio, and Upside Probability Ratio. The findings show that democratic firms outperformed moderate portfolio based on ROA and ROE after controlling for size and leverage. We report that governance provisions do not explain significant variation in firm performance for the remaining performance measures. Future studies should use absolute dollar value measures such as Economic Value Added or Shareholder Value Added to provide additional insights into this area of research. We are hopeful that these avenues of research will be explored in the near future.

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