publication . Research . Preprint . 2014

What is the Relation (if any) Between a Firm's Corporate Governance Arrangements and its Financial Performance?

Roberto E. Wessels; Tom J. Wansbeek; Lammertjan Dam;
Open Access English
  • Published: 01 Jan 2014
  • Publisher: Munich: Center for Economic Studies and ifo Institute (CESifo)
Abstract
We present a model to test the null hypothesis that firms organize their corporate governance arrangements optimally given the constraints they face. Following the literature, the model rejects the null if the conditional correlation between governance and performance is significantly different from zero. Our model provides a clean test of this hypothesis by controlling for measurement errors in all observed variables and avoiding simultaneous equation biases by casting our model as a reduced-form bivariate equation. We model governance, performance and the constraints on the firm’s investment decisions as latent variables. Our estimate of the conditional corr...
Subjects
free text keywords: C38, G34, L20, M52, corporate governance, firm behavior, hypothesis testing, errors in variables, corporate governance, optimal firm behavior, endogeneity, structural models, latent variables., ddc:330, jel:C38, jel:G34, jel:L20, jel:M52
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publication . Research . Preprint . 2014

What is the Relation (if any) Between a Firm's Corporate Governance Arrangements and its Financial Performance?

Roberto E. Wessels; Tom J. Wansbeek; Lammertjan Dam;