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

Author

Listed:
  • Roberto Wessels

    (University of Groningen, Netherlands)

  • Tom J. Wansbeek

    (University of Groningen, Netherlands)

  • Lammertjan Dam

    (University of Groningen, Netherlands)

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. We estimate of the conditional correlation between our measures of corporate governance and firm financial performance to be statistically speaking equal to zero. This result therefore provides empirical support for the in-equilibrium view of corporate governance arrangements.

Suggested Citation

  • Roberto Wessels & Tom J. Wansbeek & Lammertjan Dam, 2016. "What is the Relation (if any) Between a Firm's Corporate Governance Arrangements and its Financial Performance?," Multinational Finance Journal, Multinational Finance Journal, vol. 20(4), pages 323-354, December.
    • Handle: RePEc:mfj:journl:v:20:y:2016:i:4:p:323-354
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    Cited by:

    1. is not listed on IDEAS
    2. Fiona Kanini Malonza & Prof. Jain Mohinder, 2019. "Corporate Governance And Profitability Of Genghis Capital Limited In Nairobi City County," European Journal of Business and Strategic Management, International Peer Review Journals and Books, vol. 4(4), pages 55-75.

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    Keywords

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    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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