CHAPTER ONE INTRODUCTION

This Chapter presents the background of the study, statement of the problem, and the research objectives as well as the questions. It also discusses the significance of the research, the scope, limitations and organization of the study.

            Background of study

Corporate governance evolved in the 1700s during the South Sea bubble in England. During that period, stock prices on the London stock market rose to inexplicable heights before crashing. This was as a result of fraudulent activities and folly (Paul 2015). The south sea bubble had followed a similar crash on the Paris stock market (Mississippi bubble) around the same period (Colombo 2012). Due to this, developed countries and investors began paying particular attention to corporate governance structures of organizations and this attention has increased after the collapse of a number of large corporations during the recent global financial crisis in 2007- 2009. This has also influenced researchers, policy makers and investors to examine the impact of corporate governance on shareholder’s wealth and financial distress.

According to Mayer (1997), corporate governance refers to “ways of bringing the interests of investors and managers into line and ensuring that firms are run for the benefit of investors.”

“Corporate governance is about supervising and holding to account those who direct and control the management” (Abor 2007).

The main aim and objective of shareholders investing their wealth in a company’s shares is to see their investment appreciate in value. However, the interest in corporate governance is concerned with decreasing conflicts of interests between shareholders and management (Jensen & Meckling, 1976).

The principal–agent issue arises between upper-management (the agent) which may have very different interests and by definition considerably more information, than shareholders (the “principals”). The danger arises that, rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and obliged to management.

Traditionally, accounting based performance measures have for a long time been a norm and have been used by many to address this measure. Its seemingly simple methods of calculation led to its popularity among many academic and policymakers (Altman, 1968). However, this measure is usually one-dimensional in nature, which does not show a holistic picture of the financial health of a business but only returned a single figure which was used to define a firm’s financial status as good or bad.

In order not to only know if a firm appears profitable under the traditional accounting measures, when in reality they may not, leverage as well as profit margin on sales will be employed as a metric to assess the value created on shareholders wealth over time.

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