Problem Definition Purpose of this Research

6 In other side, manager has a prerogative to expropriate a firm’s assets by undertaking projects that giving benefits themselves personally, but impact the shareholder wealth adversely Jensen and Meckling, 1976; Shleifer and Vishny, 1997. Effective corporate governance reduces “control rights” stockholders and creditors confer on managers, increasing the managers probability invest in positive net present value projects, Shleifer and Vishny, 1997, and suggesting that better-governed firms in having better operating performance as the proxy for firm performance. Prominent examples of corporate scandals in the US, UK and many others in different continents of the world, many of which were caused by, or at least exacerbated by governance weaknesses, give rise to financial community’s which concern about the appropriateness of the firm profitability or growth prospects in valuing a firm as well as the necessity of effective control mechanisms in ensuring the investors’ funds in value-maximizing projects. However, there is no unequivocal evidence to suggest that better corporate governance enhances firm performance in different market settings Klein, Shapiro and Young, 2005. As a result, investors are still much skeptic about the existence of the link between good governance and performance indicators like share price performance and for many practitioners and academics in the field of corporate governance. It remains their search for the Holy Grail – “the search for the link between returns and gover nance” Bradley, 2004, p. 9. In spite of increasing volume of cross-country and individual country level evidence especially suggesting a positive link between corporate governance and firm performance, 7 many companies still remain unconvinced and to them, “the practical adoption of good governance principles has been “patchy” at best, with “form over substance” of the norm” Bradley, 2004, pp. 8-9. 2.2. Theory Development 2.2.1. Agency Theory Since the publication of Jensen and Mecklings seminal work in 1976, agency theory has become an important part of modern financial economics. It is commonly cited as one of the key areas in the development of modern financial considerations. This principles have been extended provide explanations of merger activity and corporate restructuring, dividend policies, executive compensation, composition of corporate boards, and capital structure, among other issues. Agency theory is the basis of the theory underlying the companys business practices used at this time. The theory develops from the synergy of economic theory, decision theory, sociology, and organizational theory. Main principle of this theory suggested a working relationship between the investor who gives authority and agency who receive authority, called manager. Agency theory has basic roots in economic theory which was exposed by Alchian and Demsetz 1972 and further developed by Jensen and Meckling 1976 who defines as “the relationship between the principles, such as shareholders and agents, such as the company executives and managers”. It defines the firm as a nexus of contracts between different resource suppliers. Two parties are central to the agency theory; principals, who supply capital, and agents, who manage the day to day of the firm’s affairs CBFA, 2000.