TITLE:
Macro Governance and Profitability around the World: A Methodological Improvement
AUTHORS:
Vince Hooper, Yan Liu, Ah Boon Sim, Asfandyar Uppal
KEYWORDS:
Macro-Governance, Profitability, Dividend Yield, Earning-Price Ratio
JOURNAL NAME:
Open Journal of Business and Management,
Vol.7 No.3,
July
29,
2019
ABSTRACT: There is a multitude of country studies between
2000-2018 that focus upon the relationship between corporate governance and
profitability, with mixed results because studies have generally focused upon
historic book value ratio measures of profitability such as Return on Assets
(ROA) and Return on Equity (ROE), rather than based on market values. Thus, the
purpose of this paper is to examine the effect of macro governance environments
upon aggregate dividend yield and earnings per share for developed and emerging
stock markets as measures of profitability and to provide a useful methodology
for correctly incorporating risk measures in a more controlled manner than many
current papers undertake. Using an augmented version of the dividend growth
model and allowing for the control of risk factors, we find that macro
governance environments have a significant influence upon dividend yield and
earnings per share. The results have policy implications for government policy
setters as improvements to governance environments may induce portfolio equity
inflow, which is increasingly seen as a driving force for economic growth.
Future research papers should use our methodology to better model firm
profitability and corporate governance within a market value context and recognise
the limitations of ROE and ROA as they rely upon less relevant book market
values. Further, studies need to better capture interaction effects between macro (country-specific) and micro (firm-specific)
governance.