Relationship between Corporate Governance and Firm Valuation in Nepal

Abstract

In the context of growing corporate financial scandals and misconduct, the purpose of this study is to examine the relationship between various internal corporate governance measures and corporate valuation (Tobin Q) in Nepal.  The study is descriptive and analytical in nature. Causal comparative research design especially multivariate regression models have been used. The method of estimation is Ordinary Least Square (OLS). Board size and independence, CEO duality and existence of audit committee as corporate governance variables and Tobin Q as performance variable for the valuation measure of 54 listed Nepalese firms over the period 2018/19 and 2019/20 have been used in the analysis. Result supports governance performance hypothesis. It shows a significant positive relationship between board size and firm value (Tobin Q). The study establishes the positive impact of CEO duality on firm valuation and concludes that independent directors are unable to play role in value creation. Finally, the role of audit committee is not significant in creating value. These results provide insights on the current regulatory provisions. The findings raise the questions over the role of our expert directors and audit committee. The need of larger board size has been established. Therefore, current regulations with respect to board size and independence; and CEO duality and audit committee need to be reassessed. Though few studies have examined role of corporate governance measures in corporate performance and valuation in Nepalese context, this study is new in its type in investigating the governance performance relationship taking recent dataset of Tobin Q as valuation measure. However, the study is based on limited internal corporate governance variables from a small sample size for only two year’s data set. Hence, generalization should be made cautiously.