Impact of intrinsic corporate governance on financial performance of indonesian SMEs

Abstract

Corporate governance is described as the policies and processes adopted by firms to reduce agency problems by considering the differentiation between owners and managers. This study aims to investigate corporate governance in the context of the profitability of small and medium-sized entities (SMEs) in Indonesia. Corporate governance is the process and structure used to direct and manage the business affairs of a corporation with the objective of enhancing shareholder value. For the examination of the relationship between corporate governance and SME profitability, this study utilised panel data obtained from 50 samples of Indonesian SMEs during a period of five years from 2013-2017. The findings of this study reveal that family ownership has a significant negative relationship with profitability of Indonesian SMEs. Furthermore analysis shows that board size and gender diversity have significant positive influence on the profitability of SMEs. This study contributes to the theoretical body of knowledge in this field by providing fresh empirical evidence on the impact of corporate governance on profitability of SMEs. Specifically, the study is beneficial for SME owners, managers, the government, management consultants and financial institutions in policy and decision making related to SMEs in Indonesia. However, this study used the data of only 50 SMEs, future studies could use a sample of more than this data set.