Investigating the Impact of Corporate Governance on the Capital Allocation Efficiency

The role of corporate governance in matching the interests of senior executives with those of the shareholders’ interests has been investigated in previous studies. If corporate governance can reduce agency costs, companies with good governance may have fewer unfavorable issues in their capital allocation. The main purpose of this study is to examine the relationship between the components of corporate governance and the efficiency of capital allocation in public joint stock companies.

In order to study and achieve the objectives of the research, 80 companies listed on the Tehran Stock Exchange (TSE), from 2015 to 2018, were selected via the purposive sampling method. The research hypotheses were tested using the panel data and fixed effects model.

According to research findings, corporate governance has a significant relationship with investment efficiency. The results also showed no significant relationship between investment efficiency and corporate governance variables including independence of the board of directors, leadership structure, the number of members of the board of directors, block-holder ownership, and the presence of outside directors in the audit committee. There is also a significant and positive relationship between institutional ownership and investment efficiency

The achieved results of the present study confirm the significant relationship between investment efficiency and corporate governance. Accordingly, investment efficiency is expected to improve as the quality of the corporate governance structure increases. Only a significant relationship between the existence of institutional investors as a corporate governance variable with investment efficiency was proved. The presence of institutional shareholders in the ownership structure and, consequently, their representative on the board of directors, can lead to better control and more efficient decision-making in capital allocation. On the other hand, there was found no empirical evidence for the relationship between other corporate governance variables such as board independence, leadership structure, board size, block ownership, and the presence of outside directors in the audit committee with investment efficiency as the agency theory proposes. The agency theory cannot explain the empirical findings; therefore, the behavioral aspect and legal limitations and requirements are required to be considered.