Abstract

Identifying corporate governance mechanisms to improve firm performance has been at the forefront of policy discussion and research in recent years. Existing research in this area focuses on U.S. based large capitalisation firms. Although some work has been performed on U.S. small caps, little work has been done in the area of governance of small-caps for other countries. Small-caps merit investigation not merely because of alleged performance attributes as first demonstrated by Banz (1981) but also because they represent the largest contingent of firms listed on the exchange. This study extends the international evidence on small-cap governance to Canada, where unlike the U.S., 'best practice' guidelines are provided, but not mandated, there are two legal systems, and multiple class voting structures, which have been suggested to be inimical to performance, are common. We test for the optimal deployment of four governance mechanisms by estimating a simultaneous equation system linking these mechanisms to firm performance, using recent data. The results confirm the interdependence of governance mechanisms and firm performance. CEO ownership and shareholder rights are shown to determine board independence while CEO ownership is shown to depend on the extent of shareholder rights and whether she is also chairperson of the board. When taking endogeneity into account, we find Canadian small-cap firms appear to over utilise debt as a control mechanism. No robustly significant discount is observed for Quebec firms, or for those with multiple voting class shares; we do, however, note a premium for U.S. cross-listing