Endogeneity and the Dynamics of Internal Corporate Governance

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2012-04-23

Summary:

Editor’s Note: The following post comes to us from M. Babajide Wintoki of the Department of Finance at the University of Kansas, and James Linck and Jeffry Netter, both of the Department of Banking and Finance at the University of Georgia.

In our forthcoming Journal of Financial Economics paper, Endogeneity and the Dynamics of Internal Corporate Governance, 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. It is well known that theoretical and empirical research in corporate finance is complicated by the endogenous relation that exists between the control forces operating on a firm and its decisions. Jensen (1993) broadly classifies these control forces (i.e., governance in a broad sense) as capital markets, the regulatory system, product and factor markets, and internal governance. In much of the extant corporate finance research, researchers attempt to either explain the causes or examine the effects of corporate finance decisions as related to one or more of these control forces. Empirical research often involves determining the causal effect, if any, of a firm characteristic (X) on some measure of firm profits or value (Y). This is usually done using the inference from a regression of Y on X along with several control variables (Z). The question is often framed as: holding Z constant, does X have an economically and statistically significant causal effect on Y?

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Link:

http://blogs.law.harvard.edu/corpgov/2012/04/23/endogeneity-and-the-dynamics-of-internal-corporate-governance/

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Blogs.law Aggregation Hub » The Harvard Law School Forum on Corporate Governance and Financial Regulation

Tags:

academic research boards of directors empirical research financial regulation board independence board composition internal control james linck jeffry netter m. babajide wintoki

Authors:

R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

04/23/2012, 10:12

Date published:

04/23/2012, 09:23