Examining the relationship between corporate governance mechanisms and financial performance of small and medium size enterprises listed in the FTSE-Alternative investment market

Corporate governance (CG) is a system by which companies can be directed and controlled (Cadbury, 1992). This thesis investigates the impact of internal corporate governance mechanisms on the financial performance of 96 listed small and medium enterprises (SMEs) in the Alternative Investment Market (AIM) of the UK for the year 2015. The study contributes in the form of recommendations on the effective CG practices that will help SMEs to improve their CG structure while enhancing their financial performance and policymakers to update or review the QCA CG code in the future. Initially, the thesis explores thoroughly the concept of CG, the theoretical background in relation to CG and the financial performance (FP) of companies. Based on the gaps in the previous literature, the CG variables (under the parameters of BOD) and the FP mechanisms were selected to examine their relationship with the sample of listed SMEs in the UK. The main themes covered by this thesis to achieve the aim involve the emergence of the CG, the overall growth of the CG in various developed and developing countries, multiple theoretical frameworks that further help to develop the conceptual framework. The principles of CG codes of the UK and previous literature assist the researcher to select the independent and dependent variables of this study (BI, BS, BGD, CEO-duality, ACS, ROA, and Tobin’s Q). As this study is based on a sample of AIM-listed companies, a detailed discussion has been presented on the submarket of the LSE (London Stock Exchange), the latest amendments in the rules of the AIM market and the CG practices of the SMEs listed in the AIM. Based on theoretical and conceptual frameworks, the researcher developed the hypotheses. In terms of research methodology, the positivist approach has been selected, data collected from the FAME database, website of LSE and the annual reports of the sample companies. Data have been analysed with the help of Gretl software and the main statistical tools selected to analyse the data were correlation, regression and ANOVA analysis. According to the results, the impact of the board gender diversity (BGD) is significantly positive on the FP of the sample companies and the board independence (BI) were found to be negatively related to the performance of the SMEs. As far as other CG variables (CEO-duality, board size and audit committee size) are concerned in relation to the FP of SMEs, a nominal relationship was found. These results will help the SMEs in the application of different CG principles while stabilising their financial performance. The findings of this study assist the practitioners to enhance the CG codes of the UK concerning SMEs and their CG structure. In addition to that, this thesis will also serve as a guide for those who seek an understanding of the concept of CG.