Abstract

http://ssrn.com/abstract=1623005
 
 

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An Alternative Measure of Corporate Governance Using Discrete Principal Component Analysis


Wendy Beekes


Lancaster University - Department of Accounting and Finance

Alex Hong


University of Western Australia - UWA Business School

Sian A. Owen


UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

June 9, 2010


Abstract:     
How is corporate governance to be measured? Much past research has focused on forming an index but this approach ignores the correlations between the variables forming the index and may also carry redundant variables. Principal Component Analysis (PCA) is a possible solution to these issues by distilling components from a Pearson correlation matrix. However, the estimated correlation matrix may be biased when discrete governance variables are involved. We use an alternative method known as discrete Principal Component Analysis which involves applying PCA to a modified correlation matrix which takes into account the underlying distribution of the governance variables. Using a sample of 760 firms in 2002, we find mixed support for prior research. Larger boards are found to negatively impact future ROA of firms whilst the proportion of old directors on the board has a negative relation with abnormal accruals and abnormal returns.

Number of Pages in PDF File: 40

Keywords: Corporate governance, firm performance, discrete principal component analysis

JEL Classification: G14, G34

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Date posted: June 9, 2010  

Suggested Citation

Beekes, Wendy and Hong, Alex and Owen, Sian A., An Alternative Measure of Corporate Governance Using Discrete Principal Component Analysis (June 9, 2010). Available at SSRN: http://ssrn.com/abstract=1623005 or http://dx.doi.org/10.2139/ssrn.1623005

Contact Information

Wendy Beekes
Lancaster University - Department of Accounting and Finance ( email )
Lancaster LA1 4YX
United Kingdom
++44 (0)1524 593623 (Phone)
Alex Hong
University of Western Australia - UWA Business School ( email )
Crawley, Western Australia 6009
Australia
Sian A. Owen (Contact Author)
UNSW Australia Business School, School of Banking and Finance ( email )
Sydney, NSW 2052
Australia
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

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