Corporate Governance, Socio-Economic Factors and Economic Growth: Theoretical Analysis

Abstract

Corporate governance (CG) fosters dynamic economic growth through managing stakeholder interest and reducing the cost of capital which ultimately lead towards the development of financial markets and better firm performance. Recently, regulators and policy makers around the world either have revised extensively or introduced new laws, codes and listing regulations to enhance effectiveness and transparency of corporate governance practices. Established economic theories were already aware of the significance of corporate governance for development and economic growth. This study assesses the link between corporate governance, socio-economic factors and economic growth through a consistent literature review. A majority of studies show a positive effect of corporate governance on economic growth of a country through stock market development. Moreover, theoretical and empirical research reveals that socio-economic factors are also a pivotal determinant of corporate governance mechanisms. This study summarizes the key findings and concludes that dynamic and flexible corporate governance system claims more demand as compared to rigorous corporate governance principles especially in emerging countries. This study also finds the need of methodological advancement in corporate governance research. Nevertheless, the social economic factors, political and legal system of the country should be blended in introduction and adaption of corporate governance system. The regulators and policy makers can use theoretical grounds of study for reforms of the corporate governance system.