294 Int. J. Business Governance and Ethics, Vol. 2, Nos. 3/4, 2006 Copyright © 2006 Inderscience Enterprises Ltd. Corporate governance mechanisms and the performance of small-cap firms in Canada Lorne N. Switzer* Finance Department John Molson School of Business Concordia University Montreal, Quebec, H3G 1M8, Canada Fax: 514–481–4561 E-mail: switz@jmsb.concordia.ca *Corresponding author Catherine Kelly Finance Department John Molson School of Business Concordia University Montreal, Quebec, H3G 1M8, Canada Fax: 514–848–4500 E-mail: katie80@hotmail.com Abstract: Identifying corporate governance mechanisms to improve firm performance has been at the forefront of policy discussion and research in recent years. Existing research in this area focuses on large-capitalisation firms, and has not provided much insight on smaller firms. This paper tests for the optimality of deployment of governance mechanisms for Canadian small-cap firms by estimating a simultaneous equation system that links four control mechanisms to firm performance, using recent data. The results confirm simultaneity between several governance mechanisms and Canadian small-cap firm performance. CEO ownership and shareholder rights are shown to determine board independence. CEO ownership in turn is shown to depend on the extent of shareholder rights and whether the CEO is also Chairperson of the board. Canadian small-cap firms appear to overutilise debt as a control mechanism. There is somewhat weaker evidence that board independence and CEO ownership are beyond the optimum. The latter, given the relatively high degree of CEO ownership in Canadian small-cap firms, is consistent with management entrenchment. We also do not find any significant discount to performance for Quebec-based firms, or for firms with dual or multiple voting class shares structures. Keywords: corporate governance mechanisms; small-cap firms; company performance. Reference to this paper should be made as follows: Switzer, L.N. and Kelly, C. (2006) ‘Corporate governance mechanisms and the performance of small-cap firms in Canada’, Int. J. Business Governance and Ethics, Vol. 2, Nos. 3/4, pp.294–328.