Corporate governance, weak investor protection and financial performance in Southern Europe

Abstract

The effectiveness of boards of directors is addressed in a context of weak legal protection using a sample of listed firms from Southern. A cross-country and panel data design is used, taking into account the endogeneity problem arising in studies of corporate governance. The results show that there is an inverted Ushaped relationship between independent directors and firm performance which allows us to identify the optimal level of independent directors on the board. Moreover, the study determines whether there are significant differences in the optimal level of independent directors depending on the family identity of the large shareholder and whether any such differences are correlated with firm performance. This article has implications for practitioners because the results fail to support good the governance recommendation suggesting that more independent directors are always in the best interest of investors.