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

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.

Automated summary

The study found a positive relationship between corporate governance and financial performance, with effective governance leading to improved performance. The results also showed that this relationship is dependent on the level of financial performance in SMEs.