“The strong influence of sound corporate governance on economic Growth: evidence from Zimbabwe”

The study examined the impact of sound corporate governance on economic growth in Zimbabwe using an econometric model. A multiple linear regression analysis was employed to examine the relationship. Secondary data for the period 1968 to 2015 was collected from World Bank’s Worldwide Governance and World Development Indicators databases. It was found that sound corporate governance is significantly correlated to economic growth in Zimbabwe in a positive and negative manner with a p-value of 0.000023235 at 5% level of confidence. On one hand, control of corruption is negatively significantly related to economic growth and, on the other hand, political stability and absence of violence/terrorism positively significantly related to economic growth. Government effectiveness, regulatory quality, rule of law and voice and accountability are insignificant in influencing economic growth in Zimbabwe at 5% level of significance. The findings from this article will assist policy formulation, policy implementation and future research. This article, however, is of great importance to government, private sector and the academia.


INTRODUCTION
How critical is sound corporate governance for economic growth given the attention paid to it in the aftermath of corporate scandals such as Enron, WorldCom and the global financial crisis and whether it can be considered a panacea for economic challenges facing the developing world in general and Zimbabwe in specific?One is forced to ask.To the World Bank (2017, p. 66), studies by Klapper and Love (2004), Claessens (2006), Kutan (2015) and Asker et al. (2015) provide evidence that achieving sound corporate governance promotes economic growth and development.World Bank (2017, p. 66) states that "sound corporate governance is the optimal balance between controlling shareholders, minority shareholders, company managers and market regulators".The growth in attention that has been devoted to corporate governance throughout the whole world is neither new nor surprising (World Bank, 2017).According to World Bank (2017), the Organization for Economic Co-operation and Development and the American Law Institute, principles of corporate governance have formed foundational references for sound corporate governance in the world over among others.
Problems and Perspectives in Management, Volume 15, Issue 2, 2017 These principles guarantee a minimum standard through which companies are directed and controlled.Okpara (2011) reasons that sound corporate governance principles provide shareholders with judicial recourse in case of violation of rules.Sound corporate governance provides investors with the comfort needed to finance business ventures of others without exerting direct control over the affairs of the company (Shleifer & Vishny, 1986; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2000; Holderness, 2003;Dyck & Zingales, 2004).Sound corporate governance results in easier access to capital, company growth, generation of tax revenues, as well as employment creation (Arora, 2014; Rupeika-Apoga, 2014).To Gompers et al. (2003), Brown and Caylor (2009) and Ammann et al. (2011), sound corporate governance also contributes to value maximization throughout the life of a company.Sound corporate governance gives executives and managers the authority to efficiently and sufficiently apply their skills and business acumen (Grossman & Hart, 1982;Denis & Serrano, 1996;Aggarwal et al., 2009).Bebchuk (2013) claims that sound corporate governance ensures that proper internal structures, processes and adequate risk management measures are in place.
Research studies have also shown positive affect of sound corporate governance on equity returns and efficiency (Ates et al., 2014;Lan & Varottil, 2015;Liljeblom & Maury, 2015).Policy-makers need to appreciate the role of sound corporate governance in sustainable economic growth and development (Posner, 1983;La Porta et al., 1996).Sound corporate governance principles are critical elements in restoring and boasting investor confidence and trust (Tiwari, 2010).De Paula (2003) cited by Tiwari (2010, p. 2) states that sound corporate governance enhances economic growth and development through two mechanisms which are associated with financing and investment and economic system efficiency.This study seeks to examine the strong influence of sound corporate governance on economic growth in Zimbabwe.
The remainder of the article is structured as follows: section 1 provides the literature review; section 2 describes research methodology; section 3 contains data analysis and interpretation and last section concludes.Similarly, Lemmon and Lins (2003) using a sample of 800 firms in eight East Asian countries find out that the financial crisis negatively impacted firms' investment opportunities, raising the incentives of controlling shareholders to expropriate minority investors.Their study also found that stock returns between 10% and 20% and lower were realized in firms where managers had high levels of control rights, but had sepatheir control and cash flow ownership than others.The study made use of regression analysis.To Claessens (2003), "this provides firm-level evidence consistent with the view that corporate governance helps explain firm performance during a financial crisis" (p.19).According to Classmen (2003), "this shows that corporate governance can play an important role in determining individual firms' behavior, in particular the incentives of insiders to expropriate minority shareholders during times of distress" (p.18).Cornett et al.'s (2009) study on the performance of U.S.A.'s publicly-traded banks before and during the financial crisis found that bank performance decreased dramatically during that pe-riod.Their study also found that CEO pay-forperformance sensitivity (PPS) and insider ownership weakened significantly just before and during the financial crisis.Of interest was the significant impact corporate governance had on market returns in 2008 for the largest banks and not as much for the smaller banks.To Cornett et al. (2009), those banks which exhibit the strongest corporate governance controls performed best.The study employed regression analysis.

METHODOLOGY
This article seeks to examine the strength of sound corporate governance on economic growth in Zimbabwe from 1968 to 2015 through an econometric analysis of secondary data.Zimbabwe was selected given its economic challenges, as well as the availability of secondary data.
In the study, data were obtained from the World Bank official websites, that is, the Worldwide Governance Indicators (2016) and the World Development Indicators (2016) databases.The article employed an econometric model to analyze the relationship between corporate governance and economic growth in Zimbabwe from 1968 to 2015.The following multiple regression model was obtained: where GDP being the dependent variable repre- senting economic growth in millions, CC -con- trol of corruption, GE -government effective- ness, PSAVT -political stability and absence of violence/terrorism, RQ -regulatory quality, RL -rule of law and VA -voice and accountability,

Variables and their explanations
GDP GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products.It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources

CC
Control of corruption captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests

GE
Government effectiveness captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies PSAVT Political stability and absence of violence/terrorism measures perceptions of the likelihood of political instability and/or politically-motivated violence, including terrorism

RQ
Regulatory quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development

RL
Rule of law captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence

VA
Voice and accountability captures perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media Note: The ranking indicates the country's rank among all countries covered by the aggregate indicator, with 0 corresponding to lowest rank, and 100 to highest rank.
Worldwide Governance Indicators, that is, the six dimensions of governance measures governance at national level, as this will cascade downwards to corporate and individual levels.These six dimensions were examined to ascertain their impact on economic growth in Zimbabwe as stated above.Table 4 below shows the variables used in the regression model and their explanations.

DATA ANALYSIS AND INTERPRETATION
In this article, a multiple regression analysis was carried out to examine the impact of sound corporate governance on economic growth in Zimbabwe.The results of the econometric model are presented in Table 5 below.
From Table 5 above, it is evident that the impact of sound corporate governance as measured by the six dimensions of governance on economic growth ( ) GDP in Zimbabwe is both positive (expected) and negative (not expected).The impact of , CC GE and RQ is negative on the economic growth of Zimbabwe.However, the impact of , PSAVT RL and VA is positive on economic growth of Zimbabwe.The econometric shows an R of 0.719149 meaning that 0.52% of the variance (0.7191492 = 0.517176) in GDP in Zimbabwe is explained by the six explanatory variables acting in concert.

RL and ,
VA however, have negative influence on GDP , per capita.In this current study, CC and PSAVT are significant variables in influencing GDP as their p-values are less than 0.05.The in- consistency in the results for both studies might be as a result of different periods being covered, as well as geographical areas covered.
Durbin-Watson test of correlation among the residuals reveals a substantial autocorrelation.From the results in Table 5  , CC PSAVT and VA are statistically significant at 5% level of significance with p-values less than 0.05 thereby greatly impacting GDP in Zimbabwe with CC having a negative impact, while PSAVT and VA im- pacting GDP in a positive way.This shows that of the five governance variables, only three are statistically significant in influencing GDP in Zimbabwe for the period under consideration.These variables by construction must be positively correlated with growth, hence, the need to serious look at each variable to ascertain the causes of its behavior.In comparison with Maune's (in progress) study, , PS , RQ RL and VA are statistically significant though RL and VA are negative, while PSAVT and PS have positive influence on GDP .The factor analysis in Table 6 shows the descriptive statistics, that is, the mean, standard deviation from the mean, skewness, as well as the kurtosis and the correlation matrix at 5% level of significance showing individual variables' correlation with one another.The results show that all the variables are negatively correlated with GDP at less than 0.5.However, when these variables are compared with each other except with GDP , they are showing positive cor- relation above 0.7.
It must be noted that although there is positive correlation between sound corporate governance and economic growth, a lot needs to be done if Zimbabwe is to realize the positive gains that come with sound corporate governance.A number of reforms needs to be done to raise the country's percentile ranking as determined the World Bank's Worldwide Governance Indicators.The country has taken a positive path through the introduction of the National Code of Corporate Governance in 2016, ease of doing business reforms, realignment of the companies act and other property rights laws.
In absolute numbers, Zimbabwe has been ranking below 50% in all the six dimensions since 1968 to 2015 with the period 1968 to 1999 ranking above 18%, but below 48%.Period 2000 to 2015 has seen ranking levels averaging between 4% and 17% on all the six dimensions of governance.Although there a quite a number of factors that have contributed to the drop in ranking such as the land reform program, economic sanctions and the financial crisis (both global and local), the country has not done much towards promoting sound corporate governance.A study by Maune (2014) shows that nothing much has been done towards promoting sound corporate governance in Zimbabwe.However, a few reforms were done after the financial crisis that saw the near collapse of the financial sector and the whole economy from 2004 to 2008 before the country adopted the multicurrency regime.

CONCLUSION
The study examined the impact of sound corporate governance on economic growth in Zimbabwe using an econometric model.GDP was used as a dependent variables representing economic growth with the explanatory variable denoted by the six dimensions of governance as given by the World Bank's Worldwide Governance Indicators, that is, control of corruption, government effectiveness, political effect of each of these explanatory variables on GDP .

Table 1 .
Zimbabwe's National Code of Corporate Governance structure Maune (2014)any and their relationships with the shareholders of the company and the stakeholder groups" (p.1).For more definitions of corporate governance, see Maune (in progress).Maune (2014)gives a detailed overview of corporate governance in Zimbabwe.Maune's (2014) study took a qualitative approach to provide Zimbabwe's corporate governance overview with findings showing that Zimbabwe remains amongst a few countries that do not have a national code of corporate governance.Corporate governance practice in the World Bank's Investor Protection Index is limited in scope with regards to capturing the full breath of corporate governance issues, it, however, provides a useful snapshot of a very critical aspect of corporate governance, that is, investor protection, that is, comparable across countries.However, very few studies have started using the Investor Protection Index due to non-availability of data especially for developing countries, since the shareholder governance index which is part of the main index emerged in 2014, while conflict of interest regulation index emerged in 2004, as shown in Table2below.

Table 3 and
Figure1below show Zimbabwe's performance against countries such as Israel, Mauritius, South Africa, United Kingdom and the United States of America.These countries were selected on the basis of data availability and as Gompers et al. (2003) from literature which ranks these countries high.A mix of both developing and developed countries was used.Zimbabwe ranks below these countries in most of the indi-ces except in extent of disclosure index in which she ranks above Israel, Mauritius and the United States of America, as well as in extent of shareholder rights in which she ranks above Mauritius and the United States of America.Zimbabwe has, however, recorded its worst performance in the extent of director liability in which she recorded an index of 2 out of 10 with Israel 9, Mauritius 8, South Africa 8, United Kingdom 7 and United States of America 8.60.1.3.Empirical evidenceAccording to Tiwari (2010), very few studies have been devoted towards investigating the relationship between sound corporate governance and financial success of enterprises.However,Gompers et al. (2003)cited by Tiwari (2010) "find that firms with strong shareholder rights have superior valuation, better profits, and better sales growth" (p.3).Gompers et al.'s (2003)study used the incidence of 24 governance rules by constructing a "Governance Index" to proxy for the level of share-Source: author (data collected from World Bank's Doing Business database, 2017).

Table 3 .
Investor Protection Indices for selected countries as of 2016Source: author data collected from World Bank's Doing Business database, 2017.
Note: ISR -Israel, MUS -Mauritius, ZAF -South Africa, GBR -United Kingdom, USA -United States of America and ZWE -Zimbabwe.and Thailand] [and] finds evidence that stock returns during the crisis period are positively related to the cash flow rights of the firm's largest block holder.He finds only weak evidence, however, that the separation of cash flow rights and control rights has an effect on firm performance during the crisis" (pp.1463-1464).

Table 4 .
Explanations of variables used in the regression model Source: World Bank's Worldwide Governance and World Development Indicators databases (2016).

2
R of 0.517176 indicates that a good deal of the variability of GDP is captured by the regression model.The adjusted 2 R of 0.446519 (that is, value of coefficient of multiple correlation determination adjusted by degrees of freedom) in the model is not quite high, Dependent variable: GDP (current US$ million)

Table 5 .
Regression analysis, influence of sound corporate governance on economic growth in Zimbabwe

Table 6 .
Regression analysis, factor analysis -principal component extraction

Table 7 .
Stepwise regression analysisProblems and Perspectives in Management, Volume 15, Issue 2, 2017Kaufmann et al. (2007), GE should by construc- tion be positively correlated with growth.A decrease in government personnel quality lowers growth.GE is critical in measuring government personnel quality.Hence, the results of this study must be a cause for concern for government and its institutional quality.Their p-values are greater than 0.05 at 5% level of significance.However, above,