Determination of the Effect of Corporate Governance on Financial Performance and Financial Distress in Firms Listed on Tehran Stock Exchange

Purpose – This paper aims to empirically examine the impact of quality of corporate governance (CG) practices on firm performance and financial distress. For this purpose, Iran country was selected as sample.
Design, methodology, approach – To assess the level of CG practices at a given firm, the current study constructs corporate governance index (CGI) which consists of four dimensions: disclosure and transparency, composition of the board of directors, shareholders’ rights, and ownership and control structure. Based on a sample of 102 non-financial firms listed on the Tehran Stock Exchange, from 2009 to 2015, the effects of CG on performance and financial distress are assessed. Tobin’s Q, ROA and ROE were used to assess corporate performance. At the same time, the Altman Z-score is used as a financial distress indicator, as it measures financial distress inversely. The bigger the Z-score, the smaller the risk of financial distress.
Findings – The results showed that the quality of corporate governance has significant effect on ROA, ROE and Q-tobin index. Also, the results showed that the quality of corporate governance has no significant effect on the financial crisis.