Corporate Governance (CG) has been howling across financial economics researchers all over the world for the past 4 decades [1]. The topic become popular in Indonesia especially after the Asian Financial Crisis in 1997-1998 [2]. An effective corporate governance mechanism was defined as the way out to increasing shareholder wealth through aligning manager and shareholder interests in achieving the goals [3,4]. The goal of establishing good corporate governance in a company is maximising the shareholder’s wealth through minimising agency problems that occurs between shareholders and managers. Moreover, company with high level performance are applying superior company management system. The study of corporate governance itself focuses to either its effect on business performance or the variables that impact corporate governance mechanisms running in a firm [5]. Effectiveness of corporate governance mechanism in a company categorized as a crucial system to the financial and economic sectors in its entirety, moreover to emerging market firms [6-8].

Poor corporate governance can lead to poor stock return performance for a number of reasons. For instance, not good preforming corporate governance will cause colossal trouble starting from mismanagement of the company's financial and operational resources, presence of corruption, which then proceed to lower profits and a decline in the company's stock price or even stock crash. Researchers has studied that for governments of emerging market countries such as in Africa, the need for good corporate mechanism are essentials to tone down corrupt activities executed on the managerial levels of the company [9-13] Moreover, for instance, big cases like Worldcom, Tyco and Enron encountering sudden dramatic crash in it stock was due to the poor corporate governance [14]. In other words, bad performing corporate governance can result in lower returns for investors who hold the stock. Additionally, poor corporate governance can create an environment that is conducive to unethical behaviour, such as financial fraud, which can result in legal and regulatory penalties that harm the company's stock performance and reduce returns for investors. Furthermore, poor governance can erode investor confidence,

which can cause shareholders to sell their stock and drive the price down further, resulting in lower returns for those who continue to hold the stock.

On the other hand, excellent implementation of CG demonstrates the management commitment in lowering agency cost and increasing company’s value. which therefore draws lower cost of capital both domestically and internationally [11,15]. Furthermore, firms engaging in good mechanism of CG can reduce the foreignness liabilities, particularly if firms intend to relocate abroad or compete with enterprises in other developing nations [16]. Previous studies have stated that better internal mechanism in the corporate governance would enhance the firm’s financial performance. Thus, implementing and maintaining corporate governance are able to improve the financial indices and maximizing shareholder’s wealth, especially for publicly listed company.

The aim of this study is to make a contribution to the field of corporate governance literature in a few different ways. Firstly, it will examine and analyze the existing knowledge that pertains to corporate governance. Secondly, it will explore the various factors that affect the impact of corporate governance on stock returns across a range of existing works. By doing so, it aims to bring together and synthesize multiple research streams into a more comprehensive body of knowledge, highlighting the different methods, frameworks and models that are utilized in this field. The study will end by summarizing the most important findings and identifying any gaps in knowledge that require further investigation. Throughout the study, the term "manuscript" will be used to refer to the unit of analysis that is utilized in any examined study. 

The review will only discuss variables or antecedents that impact stock returns and are related to corporate governance. The paper will start with a general review of corporate governance and its definition, followed by a section on research methodology. The study will then present the results of the analysis, followed by a number of conclusions, limitations and research recommendations.

Theoretical Background

Agency Theory: The term of Agency Theory is usually interrelated and considered as the main theory with corporate governance. The philosophy of agency is divisive. It is either a 'powerful' organizational theory, according to proponents. The agency relationship itself are explained as an arrangement where one or even more individuals (the principals) employ additional individual in order to provide a service as the represenative, but equipped with decision-making authority [17]. There is a good chance the agent won't always act in the principal's best interests when both parties in the relationship are utility maximizers [17]. The agency connection appears in the context of the managerial finance are between (1) shareholders and managers and (2) shareholders and creditors. The separation of ownership (principal or investor) and control (agent or manager) is the most essential aspect of the agency theory and this relationship will also cause both parties to experience positive monitoring and bonding cost [17,18]. Financial management’s one most essential point is firm’s purpose is to maximize shareholder’s wealth [19].

Agency Problems

Defined as problem arise when principal, who owns the business, is segregated as from agent, whose administers the business in the principal's best interests. Meanwhile, in reality, there is uncertainty whether agent manages company based on the shareholders/principal interest. Managers were chosen by share owners; due to that, managers are look forward to operate in accordance with shareholders' wishes; yet, disputes frequently arise during this process [18]. Companies in Indonesia uses a two-tier board management that separates the owner and management of the company. As a result, there is higher chance for conflict of interest to occur. There is vertical and horizontal agency problems that can happened. Asymmetric information, profit manipulation, excessive debt use and reluctance to pay dividends to shareholders are a few manifestations of the vertical agency problem that exists in Indonesia. Meanwhile, consolidated ownership (institutional shareholders) is the root source of horizontal agency issues in developing nations, including Indonesia. Therefore, implementing excellent corporate governance is one strategy to tackle the conflict of interest that occur to stop the management from acting opportunistically.

Stock Return

The profits from investing are referred to as a return. The stock market does not always guarantee investors a specific return. Dividends and capital gains are two stock return components that investors can use to their advantage. Expected return and realized return are another two different types of yield. Realized return calculated using historical data. This return is significant because it serves as a benchmark for future risk and returns calculations as well as one way to calculate the performance of the organization. The return that investors anticipate receiving in the future, notwithstanding uncertainty, is known as the expected return. The greater the projected return on an investment, the more the risk that the investor must bear (High risk-high return, low risk-low return).

Corporate Governance

Corporate governance is widely defined in many ways depending on the researchers [20]. Cardbury report defined corporate governance as the philosophy that leads and governs the firm in order to achieve a balance between the organization's strength and authority in giving accountability to its stakeholders [21]. Meanwhile Indonesian government defined it as a philosophy that underpins a procedure and firms’ management mechanism based on regulation and business ethics, according with Indonesian government. 

Conflicts of interest brought on by the separation of ownership and control, which calls for oversight, are dealt with by corporate governance [20]. Political control is also one factors that intervene the corporate governance decision making progress [22-24]. Politicians with huge authority on company’s decision, often uses their opportunities over political goals that is rectifying market pitfals or enhancing community’s reputation at the expense of company’s performance [25-27]. The corporate governance model such as Anglo-Saxon, German and Japanese model are the framework that are popularly studied by researchers [28,29].

In order to maintain the integrity and long-term viability of a country's capital markets and corporations, as well as to ensure that company assets are used efficiently and productively for the benefit of investors and other stakeholders, it is crucial for company levels to be well-equipped and to recognize the importance of corporate governance. As a result, corporate governance is closely linked to the role of monitoring for corporate management to work effectively [30]. Internal expropriation can be curtailed, investors' best interests can be protected and effective operating performance and optimal business decisions can be ensured by corporate governance procedures [4].

The research study board composition, board process, ownership structures, board structure, board size, board characteristics and gender diversity as the components of internal corporate governance mechanism. An effective board process measured a company’s board activity [31]. Board process was indicated as the organization and management of the board, which must be done in purpose to obtain the board's objectives [32]. In agency theory, boards must be autonomous and efficient in regulating and supervising the activities of the top management [4,17]. In a study done towards non-financial institutions that registered in LQ-45 index had shown that board process has a negligible impact on stock returns [18]. The findings contradict, who found positive link among board process as a crucial corporate governance indicator and stock return [33].

Board Compositions and Stock Return

The stage of independence between a board's members and CEO of a company is known as board composition [34]. Driven by the desire to retain its reputation, board composition is seen as a representation of objective and competent control systems [4]. Research found that the board composition does have significantly beneficial and considerable impact on current and future operating performance [35]. Another research also has proven that the board composition does have significant relationship to the stock return [36]. But in contrast to the research Okon Akpan [37], the correlation of composition of the board to the company’s performance is found to be negative and insignificant. Earlier research has also found that there was no relation of board composition along with the company performance where it believes that the percentage of inside and outside executives has no pertinence to how the business performs [38]. Furthermore, study by Anwaar [39], explained that the company’s performance measured using profit margin and uncertain has strong and positive impact on stock return. In addition to that, it was found that quick ratios and return on equity has positive but insignificant influence to the stock return.

Board Process and Stock Return

In order to effectively monitor and oversee management's operations and to safeguard the interests of shareholders, boards must be independent and effective in their decision-making [4,17]. This process called board process. According to another study, board process relates to the healthy and occasionally frank debate of company issues and problems in order to reach and support choices. There is certain connection between the stock return and the board structure, which is a component of corporate governance. An effective board process measured a company’s board activity [31]. Board process was indicated as the organization and management of the board, which must be done in purpose to obtain the board's objectives [32]. In agency theory, boards must be autonomous and efficient in regulating and supervising the activities of top management [4, 17]. In a study done towards non-financial institutions that registered in LQ-45 index in Indonesian Stock Exchange had shown that the board process has a negligible impact on stock returns [18]. The findings contradict, who found a positive link between board process which was identified as a crucial corporate governance indicator and stock return [33].

Board Structure and Stock Return

The structure of the board is one of the key aspects of governance system which has tremendous influence on company performance thus its financial performance. Previous research has indicated that board structure can improve monitoring and accounting transparency in managerial level [40]. Measurement of board structure was identified to have positive but less substantial impact on stock performance [18]. This was supported by previous study done by Wijayanti et al. [41], that found the board structure has positive and significant influence to the investor confidence which higher confidence reflects future news is positive and stock prices are increasing. Rising prices, however, are correlated with both positive fundamentals, such as increases in industrial production and productivity and the underlying mood or attitude of investors. Thus, the increase in stock prices will provide capital gain for investors.

Board Size and Stock Return

Board size is defined as the total number of directors in the board [42]. Board size are studied to have strong negative influence on profitability, performance of the company and its shared returns [43] Larger number of the board will most likely to perform a poor monitoring function and thus any negative effects of high board sizes are likely to reflect problems with the board's advisory rather than monitoring function [44]. But in the other hand, study by Okon Akpan [37], has proven that board characteristics have positive and significant influence to company performance measured through turnover. Moreover, smaller boards have stronger positive relations compared to the larger board count.

Table 1: Previous Study

Table 1: Continue

In contrast, a meta-analysis study shows a connection of board size to company’s performance is favourable and draws on findings from a number of earlier cases from US companies in the study. These contradictory results imply, in a sense, that there can be benefits and drawbacks to larger boards [45]. Ludwig and Sassen, [46], studied that the number of the boards has to be properly arranged and organized and prioritizing the higher proportions of independencies and diverse educational background to collect various perspectives thus will increase its social and environmental performance.

Board Characteristics and Stock Return

The governance system of a firm is made up of a number of linked characteristics, all of which are important to provide high monitoring level [47]. Through past research, board characteristics has a positive and significant influence to the stock yield of a corporation and could be moderated by investor confidence[18]. Board characteristics are studied to have important aspects on the accounting reports of the company that are very vital to the firm due to act of monitoring done by the boards that will influence the either manipulation or honest reports [48,49]. Furthermore, boards’ expertise and proper incentives is proven to have influence on the ability of the boards in monitoring the company [50]. Meanwhile in the other side, [4], has study that the level of willingness and performance of the boards in monitoring the firm will mostly depends on their desire to attain specific management positions and its reputation concerns.

Gender Diversity and Stock Return

Gender diversity is the percentage level of woman who serves as the board members [42]. Board gender diversity can generally be considered as intrinsic components of board compositions. Female board members are studied to be more risk averse individuals [51], compared to male which leads to a more conservatives’ financial decisions. Female directors offer more knowledge and close scrutiny, are more engaged on corporate boards and are more likely to propose questions that male directors might not. As a result, having women on corporate boards increases their independence and efficiency. Research by Chen et al. [52], found that to have female directors increases the efficacy of the board in managing risks related to RandD expenditure, this is due to the risk averse character in female directors. In a study conducted by Bazel-Shoham et al. [53], concluded that gender diversity has positively and significant relationship to company performance.

Ownerships Concentration and Stock Return

Increased concentration of ownership of enterprises can boost the performance, but the impact of institutions and international participation is insignificant [54]. Study by Raithatha and Haldar [55], found that in an emerging economy, higher ownership concentrations would help company to expropriate minority shareholders which thus the alignment of interest would be easier and this will result in the better financial performance of the companies. Based a study by Hegde et al. [56], low levels of family shareholdings and abnormal stock yield have no correlation, whereas high levels of family stakes have an occasional positive and significant relationship. In India, family dominance often improves company success in markets with low competition and rapid growth. This result runs counter to the negative value effects of excessive ownership concentration and is in contrast to developed countries with lower growth rates and higher levels of product market competition.

Figure 1: Conceptual Framework

Source: Author

Influence of Corporate Governance Internal Mechanism to the Stock Return

In the past, research has been conducted on the relationship between corporate governance and stock returns. A study that was previously published in various journals found that such a relationship exists. The following are the results of previous investigations that were gathered from selected journal articles.

The main goal of a systematic literature review is to compile and evaluate the research that is currently being done on the topic of interest, producing objective findings that can be verified and replicated [57]. A systematic literature review is a comprehensive evaluation of research findings with the aim of grouping comparable works and assisting in the development of recommendations based on evidence for subject matter experts in the field of study [57]. This study uses 20 articles gathered from research article from reputable sources.

The researched variables have been identified from the literature review. Based on the initial review, stock return is affected by board composition, board process, board structure, board size and board characteristics. Furthermore, in this research two variables are added. The variables are gender diversity and ownership concentration. This addition due to inconsistent results on the additional variables. The conceptual framework is shown in Figure 1.

Study of internal corporate governance mechanism and role of corporate governance in the performance of businesses had always been a popular topic, as this problem has grown increasingly significant from around world in terms of current revelations and company financial crisis. After conducting a comprehensive and structured analysis of the relevant literature on the internal corporate governance mechanism and stock return, this systematic literature review has synthesized a conceptual framework. Corporate governance mechanism has various indexes that can be measured and each of this has different influence to the company. Variables that are found to have relationship with stock return are board composition, board process, board structure, board size, board characteristics, gender diversity and ownership concentration. The conceptual framework depicts the relationship between corporate governance factors and stock return. Understanding and implementing corporate governance is critical to determine its significancy to the stock return level in the future.

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