Corporate governance and capital markets: a conceptual framework

Abstract

This paper outlines a conceptual framework of the relationship between corporate governance and two important determinants of capital market development namely, a firm’s access to finance, and its financial performance. The framework assumes that a firm’s corporate governance is simultaneously determined by a group of related governance components and other firm characteristics. Whilst the capital markets play a crucial role in enhancing corporate governance standards, the effectiveness and credibility of such effort might be constrained by poor firm-level corporate governance. Moreover, the cause and effect relationship can work in the opposite direction e.g. firm-level corporate governance quality can enhance both the firm’s ability to gain access to finance and its financial performance, which eventually lead to capital market development. The framework is primarily based on the economic approaches to corporate governance, although it recognises part of the assumptions of the stakeholder theory and the political economy aspects of corporate governance.