Does Corporate Governance Matter after All? Quality of Governance and the Value of Canadian Firms after 2008

Abstract

Canadian firms listed in the TSX/S&P index are ranked according to its governance standards by a leading Canadian newspaper The Globe and Mail Report on Business every year. The objective of the present study is to investigate what are the determinants of governance in the case of Canadian firms and to assess the relationship between governance and firm value after the shift in the governance regulation occurred in the aftermath of the 2008 financial crisis. We estimate the effect of governance on stock return by using different econometric approaches in order to control for the endogeneity of governance structures. The results show that larger firms and firms with higher market value (measured by the Tobin’s q ratio) adopt better standards of governance. However, the results also show a negative significant impact of governance on stock return. The evidence provided by our study offers important insights, especially for policy makers that have recently changed the Canadian governance system from a “comply or explain approach” to a “principles approach”. Our results indicate a lack of evidence of market enforcement for the adoption of better standards of governance. With a more lenient regulation, like occurred in other countries, self-enforcement is unlikely to be an effective mechanism for implementation of best practices of governance.

Keywords: Corporate Governance, Firm Value, Corporate Governance Score, Endogeneity, Simultaneous Equations

JEL Classification: G34