Endogeneity and the Dynamics of Internal Corporate Governance
M. Babajide Wintoki
University of Kansas - School of Business
James S. Linck
Southern Methodist University
Jeffry M. Netter
University of Georgia - Department of Banking and Finance; University of Georgia Law School
August 4, 2011
Journal of Financial Economics (JFE), Forthcoming
We use a well-developed dynamic panel 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. The estimator incorporates the dynamic nature of internal governance choices to provide valid and powerful instruments that address unobserved heterogeneity and simultaneity. We re-examine the relation between board structure and performance using the GMM estimator in a panel of 6,000 firms over a period from 1991-2003, and find no causal relation between board structure and current firm performance. We illustrate why other commonly used estimators that ignore the dynamic relationship between current governance and past firm performance may be biased. We discuss where it may be appropriate to consider the dynamic panel GMM estimator in corporate governance research, as well as caveats to its use.
Number of Pages in PDF File: 55
Keywords: Endogeneity, Corporate Governance, Board Structure, Board Size, Board Independence, Dynamic Panel GMM Estimator
JEL Classification: G32, G34, K22
Date posted: March 15, 2007 ; Last revised: March 22, 2012
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