Is corporate governance a good predictor of SMEs financial performance? Evidence from developing countries (the case of Lebanon)

ABSTRACT

This paper aims to empirically examine the link between corporate governance and the financial performance of small and medium enterprises (SMEs) in Lebanon. To this end, we use a questionnaire and collect data from a sample of 150 non-listed companies. The Bundles approach following R. Aguilera et al. (2008). ‘An Organizational Approach to Comparative Corporate Governance: Costs, Contingencies, and Complementarities.’ Organization Science 19: 475–492.) is used to construct a corporate governance score based on three main components. By applying 2SLS regression to control for endogeneity and a quantile regression, we study the impact of corporate governance (CG) score and each of its components on the financial performance (FP) measured by return on assets (ROA) and return on investment (ROI) while controlling for SMEs age, size, and industry. The study indicates positive interdependency between CG and FP. Effective CG results in increased FP and better performing companies tend to improve their CG). Interestingly, our results show that this relationship depends on the level of SMEs FP These findings provide managers with useful insights and serve as an underpinning for more regulatory efforts aimed at strengthening the CG of SMEs in Lebanon.

KEYWORDS:

• Small-medium enterprise
• financial performance
• corporate governance
• return on assets
• return on investment

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 We rely on the report ‘Lebanon SME strategy: A roadmap to 2020 –Lebanon Ministry of Economy and Trade-UNDP’ to have SME definition in the Lebanese context. An SME is an enterprise consisting of 10–100 employees, generating sales revenue that falls between 500 million LBP and 25 Billion LBP. SME categorization follows two criteria: the number of employees and the annual sales or turnover. There are three sets of the number of employees (set 1=10;10 < set 2 ≤ 50; 50 < set 3 ≤ 100) and three sets for annual sales (set1=500 million LBP; 500 million LBP <set 2≤ 5 billion LBP; 5 million LBP <set 3≤ 25 Billion LBP).

2 We rely on IDAL ‘The Investment Development Authority of Lebanon’ for the types of businesses which are: Limited Liability company (S.A.R.L), Joint Stock Company (S.A.L), Branch of foreign company, Representative office, Offshore, Holding.