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Endogeneity and the dynamics of internal corporate governance

Listed author(s):
  • Wintoki, M. Babajide
  • Linck, James S.
  • Netter, Jeffry M.
Registered author(s):

    We use a well-developed dynamic panel generalized method of moments (GMM) estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structure. The estimator incorporates the dynamic nature of internal governance choices to provide valid and powerful instruments that address unobserved heterogeneity and simultaneity. We re-examine the relation between board structure and performance using the GMM estimator in a panel of 6,000 firms over a period from 1991 to 2003, and find no causal relation between board structure and current firm performance. We illustrate why other commonly used estimators that ignore the dynamic relationship between current governance and past firm performance may be biased. We discuss where it may be appropriate to consider the dynamic panel GMM estimator in corporate governance research, as well as caveats to its use.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X12000426
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 105 (2012)
    Issue (Month): 3 ()
    Pages: 581-606

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    Handle: RePEc:eee:jfinec:v:105:y:2012:i:3:p:581-606
    DOI: 10.1016/j.jfineco.2012.03.005
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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