Corporate Governance and Firm Performance: Analyzing the Social Capital of Corporate Insiders
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This dissertation is concerned with how the social capital of corporate insiders is associated with the governance and performance of publicly listed small and medium- sized enterprises (SMEs) in Canada. The premise of social capital theory is that relationships matter and that network structures have implications for outcomes. Encouraging SME growth and performance is an important part of economic policy. In Canada, going public is one way innovative SMEs can access capital for growth. This research considers the network of relationships between directors, owners and senior officers in a public corporation – i.e. the social capital of corporate insiders – to better understand corporate governance. Family-run firms, large corporate ownership and professional relationships between directors have been the subject of numerous corporate governance studies. They can also be considered networks. In this research, I assume that these various networks act to unite corporate insiders into coalitions with similar interests. I consider the implications of social capital on firm performance in terms of effective control, director independence, CEO ownership, and family control of the firm. The hypotheses, generated from the theory of internal social capital of the firm, are tested using fixed and random effects regression models on a panel of Canadian industrial SMEs that had an initial public offering between 2000 and 2010. SME performance is measured by Tobin’s Q. I find support for the idea that the structure of social capital within the firm is related to corporate governance and associated with performance. My results indicate that having multiple coalitions in the firm, as well as more independent directors, are both positively associated with performance. There are also indirect effects related to the social capital of the firm. After controlling for the structure of social capital in the firm, CEO ownership is found to have no association with firm performance, except in a few cases where the CEO owns in excess of 40 percent of the firm. Once these cases are omitted from the sample there does not appear to be a significant relationship between CEO ownership and performance. These few cases suggest the role of CEO may be important to performance outcomes in highly controlled firms. Further case-study research into this finding may be merited. Finally, I find no evidence that family-run firms have valuations that differ from other firms. The theory of internal social capital of a firm contributes to the corporate gov- ernance literature by considering how the network of relationships within the firm affects outcomes. There are also useful methodological contributions from this re- search. Theoretically grounded network measures determine: (i) a scale of effective control of a firm when there are multiple coalitions of owners, and (ii) a way to iden- tify truly independent directors. Entrepreneurs, directors and managers will find this research useful because it outlines how the structure of relationships within an SME is associated with firm valuation.