Corporate Governance, Expected Operating Performance, and Pricing
We examine whether ownership and governance characteristics are associated with the firm s operating performance and stock price. We hypothesize that while ownership structure and governance mechanisms impact the firm's operating performance, they can also impact stakeholders abilities to expropriate rents from other stakeholders. We use a two-step estimation approach to assess whether the benefits of a better governance system manifest as higher operating performance, or as a premium on share price. To mitigate potential problems from using conventional accounting performance measures, we use Ohlson s (1995) expected residual income (ERI) valuation metric, which is conceptually superior to conventional measures. Results suggest that (1) higher share ownership of the CEO, corporate insiders, and outside directors has a strong positive impact on both firm performance (measured by the ERI metric) and market value; (2) large ownership of outside shareholders has a negative impact on the firm s operating performance; (3) presence of a controlling shareholder has an adverse distributive effects for other shareholders; (4) after controlling for ownership, there is no improvement in operating performance or share value from having greater representation of outside directors, or having a larger board; and (5) variables representing the CEO s stature the CEO s tenure and the board chairmanship have a negative impact on the firm.
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