Corporate Governance, Agency Problems, and Firm Performance: Empirical Evidence from an Emerging European Market

Abstract

Agency problems may arise from the separation of ownership and management (Type I) or from conflicts of interest between controlling and non-controlling shareholders (Type II). In this study, we investigate whether the relation between corporate governance and firm performance depends on the type of agency problem. Given its unique characteristics in terms ownership dispersion across the stock market’s segments, we use Cyprus as a natural experiment setting and we find a relation between governance and performance, primarily for firms more prone to Type I rather than to Type II agency problems. We interpret these findings as consistent with the view that governance effectiveness is a function of the type of agency problem. Thus, a uniform set of governance regulations, which is often applied, is unlikely to be efficient and/or optimal for all firms.