The Impact of Corporate Governance on Financial Performance: An Analysis of Small-Cap Companies Listed on the Hong Kong Stock Exchange

Abstract

This paper examines the impact of selected corporate governance mechanisms on the financial performance of small-cap firms listed on the Hong Kong Stock Exchange. Small-cap firms face different realities than large companies in terms of financial constraints, concentrated ownership, and heavy compliance demands. As related to the above, this study focuses on three chosen mechanisms, namely: board independence, Chair/CEO duality, and audit committee activity. A mixed-methods research methodology was adopted for this study. The quantitative component involved a simple regression analysis on a sample of 100 firms spanning from 2018 to 2023. Financial metrics of return on assets (ROA) and return on equity (ROE) were used as financial performance measures. The qualitative approach adopted semi-structured interviews with 14 directors and governance professionals. The transcripts were analyzed using phenomenological techniques to capture lived experience of the participants. The empirical results show that higher board independence has little and, at times, a negative impact on financial performance, suggesting inefficiency and a largely symbolic role on the part of independent directors. When the Chair and CEO roles are combined, both ROA and ROE decline, highlighting the risks of concentrated authority. More frequent audit committee meetings do not by themselves lead to better results, rather it is the quality of the meetings that matter more. Participants’ responses echo a similar conclusion in that box‑ticking compliance and limited resources are the persistent hurdles.