Effect of corporate governance and competitive advantage on firm performance: a case study of listed companies in the stock exchange of Thailand

Abstract

The purposes of this research were 1) to study the effect of corporate governance on firm performance, 2) to examine the effect of corporate governance on competitive advantage, and 3) to find out the effect of competitive advantage on firm performance. The quantitative data consisted of 5-year longitudinal/panel data (2011- 2015). Only qualified companies listed in the Stock Exchange of Thailand (SET) were selected as population. The total of 203 shortlisted companies were good for 1,015 observations. The dummy variables derived from IOD corporate governance scores were used as corporate governance indicators. Only the financial perspective of competitive advantage, or the weighted average cost of capital was considered, Return on asset, return on equity, Tobin’s q, and market value to book value were used as firm performance indicators. The control variables were market capitalization, GDP, years listed in the SET, and firm leverage. The techniques for analysis were panel regression by the fixed-effect method and the random-effect method. The Hausman test was carried out to select the appropriate method. The model was validated and corrected using Multicollinearity, Heteroskedasticity, and Autocorrelation. The results were as follows. 1) Corporate governance had a positive effect on firm performance when market value to book value was used as an indicator. On the other hand, no effect was found if return on asset, return on equity, and Tobin's q were used as indicators. 2) Corporate governance had a positive effect on competitive advantage (the cost of capital decreased). This confirms that Agency Theory is applicable to Thailand. 3) Competitive advantage had a positive effect on firm performance when market value to book value was used as an indicator. However, it had a negative effect on firm performance if return on asset and return on equity were used as an indicator. No negative effect on firm performance was found when competitive advantage was measured with Tobin's q. Based on the above findings, the following were recommended: 1) The results support Agency Theory, which stresses that this Western theory can be applied to Thailand. 2) The Stock Exchange of Thailand should encourage listed companies to comply with corporate governance because the higher the score of corporate governance, the lower the cost of capital (competitive advantage). 3) Related agencies should promote or educate listed companies to focus more on cost of capital management since the lower the cost of capital, the better the firm performance. They should also urge longstanding listed companies to be flexible or active in response to business conditions all the time.