The Theory of the Firm and Corporate Governance: An Empirical Analysis

The paper considers a test of the theory of the firm and the alternative theories of firm behaviour, using a combination of both primary and secondary data. The primary data was collected from 310 managers of UK based firms and the secondary data was collated from the FAME (Financial Analyses Made Easy) database and the FTSE ISS Corporate Governance Index. This data is used in a number of binary probit models to test the validity of competing theories of the firm. Finally, the data is used to test an original hypothesis, that the level of corporate governance is the factor which determines whether the managers of a firm will aim for maximum profits. The results of the probit model show that, regardless of any other variable, a firm with a high degree of corporate governance is more likely to aim for a maximum level of profits than a firm with a lower level of corporate governance.