Understanding the Endogeneity between Firm Value and Shareholder Rights

Chi, J. Daniel

doi:10.2139/ssrn.925910

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Understanding the Endogeneity between Firm Value and Shareholder Rights

23 Pages Posted: 23 Aug 2006

See all articles by J. Daniel Chi

J. Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance

There are 2 versions of this paper

Date Written: June 2005

Abstract

I explore the relation between firm value and the shareholder rights-based Governance Index G, which has become a popular measure of governance quality among researchers and investors. I show that the relation is not spuriously driven by unobservable firm heterogeneity or an assortment of observable firm characteristics, such as firm growth potential and profitability. The causality seems to run from G to firm value, rather than from firm value to G. My results suggest that granting more rights to shareholders could be an effective way to reduce agency costs and enhance firm value. (This is the working paper version of the published paper in Financial Management, Winter 2005, Volume 34, Issue 4, p. 65-76.)

Keywords: endogeneity, governance, shareholder rights, governance index, panel data

JEL Classification: G34, C23

Suggested Citation: Suggested Citation

Chi, Jianxin Daniel, Understanding the Endogeneity between Firm Value and Shareholder Rights (June 2005). Available at SSRN: https://ssrn.com/abstract=925910 or http://dx.doi.org/10.2139/ssrn.925910