What is the Relation (If Any) between a Firm's Corporate Governance Arrangements and Its Financial Performance?

33 Pages Posted: 23 Dec 2013

See all articles by Roberto E. Wessels

Roberto E. Wessels

University of Groningen - Faculty of Economics and Business

Tom Wansbeek

University of Groningen - Faculty of Economics and Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2013

Abstract

This paper presents estimates from a latent variables model of the relation between corporate governance and financial performance. We use data on large US corporations to estimate the correlation, conditional on the firms’ investment opportunity set, between governance and performance. We find that this correlation is statistically speaking zero.

This result is consistent with the “equilibrium view” (Demsetz, 1983) in which firms optimize corporate governance arrangements subject to the constraints imposed by the investment opportunity set, such that observed corporate governance arrangements and firm performance are uncorrelated. The intuition behind this statement is that, if governance and performance were correlated, performance could be improved by making changes to the governance arrangements, which is at odds with an equilibrium situation.

Keywords: Corporate governance, firm behavior, hypothesis testing, errors in variables

JEL Classification: C38, G34, L20, M52

Suggested Citation

Wessels, Roberto E. and Wansbeek, Tom, What is the Relation (If Any) between a Firm's Corporate Governance Arrangements and Its Financial Performance? (December 21, 2013). Available at SSRN: https://ssrn.com/abstract=2371051 or http://dx.doi.org/10.2139/ssrn.2371051

Roberto E. Wessels (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

+31-50-3633633685 (Phone)

HOME PAGE: http://www.rug.nl

Tom Wansbeek

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

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