The Moderating impact of directors' demographic characteristics on the relationship between corporate governance and firm performance in China's listed companies

Abstract

The increasing reliance on corporate governance raises questions about whether corporate governance has a positive impact on financial performance, and whether or not intervening variables moderate the strength of the relationship between corporate governance and firm performance. Therefore, based on upper echelon theory, this study builds a comprehensive framework to answer these questions through integrating directors’ demographic characteristics into conventional corporate governance model. Using a sample of 155 Chinese listed firms during the period of 2004-2008, this study develops an index as a proxy for the quality of corporate governance and finds that good corporate governance can significantly positively affect firm performance. Further, the study examines the interaction effect of corproate governance and directors’demographic heterogeneity, and indicats that demographic heterogeneity within board of directors can moderate the relationship between corporate governance and firm performance. From a theoretical perspective, this study not only explains how corporate governance affects firm performance, but also uncovers the importance of demographic characteristics in a corporate governance system. From a practical perspective, this thesis not only emphasises that optimal structure of corporate governance can significantly enhance the firm performance, but also indentifies that the directors’ demographic characteristics heterogeneity has a strong moderating impact on the effectiveness of corporate governance in Chinese listed companies.