Abstract
This thesis studies the relationship between corporate governance and firm performance in the context of U.S. institutions. The aim of the thesis is to contribute to its field of research from a mainly Transaction Cost Economics (TCE) perspective. Hence, this thesis is not a direct contribution to Agency Theory (AT) which has been the dominant paradigm in the field of corporate governance and firm performance up to this day. However, given that most of the relevant research in this area of study has been, for the last thirty years, conducted using AT, this thesis starts with a critical appraisal of this literature and a statement of the reasons why AT is not employed. The thesis' critical review of AT identifies important problems. A key issue is that the field is divided in two camps, both of which rely on AT, which nevertheless reach diametrically opposed conclusions: while one group of researchers finds a significant relationship between corporate governance and firm performance, an opposing faction argues that no such relationship exists. This thesis criticizes this literature by (a) arguing that the conflicting results are the consequence of: not applying the different AT theories to the class of phenomena they were designed to explain (b) by showing that part of the extant research is in a pre-theoretical stage, and (c) by mustering the arguments of AT theorists who have stated that some of their own work is flawed. It is because of these pitfalls in AT that this thesis is designed to contribute to the field of corporate governance and firm performance from a mainly TCE perspective. Starting with the TCE approach to corporate governance, this thesis uses insights taken from a lifecycle theory of the firm to fill in gaps in TCE concerning the issue of bilateral dependency between a firm and its shareholders. Thus, a key contribution of the thesis is a new model which explains how corporate governance changes as the firm matures and the effects of such changes on firm performance. The model is then tested for empirical validity at which stage additional important contributions are made, especially, a new measurement of firm financial autonomy, the "A-index", is developed. Moreover, an entrenchment index currently available in the literature is employed, and investment performance and firm valuation are measured employing marginal q and Tobin’s q respectively. The empirical results provide statistically significant evidence in favour of the predictions of the model. The thesis concludes that the new combined theory is an important contribution to positive economics and finance: the theory states clear, testable, predictions which are supported by the data.