Board Composition, Managerial Ownership, and Firm Performance: An Empirical Analysis

Abstract

Simultaneous-equations techniques are being used more often in corporate governance research. However, when no formal theoretical model is present, misspecification in one or more of the first or second stage regression is likely, causing empirical results to be seriously biased. This paper investigates the combined effect of ownership structure and board composition on corporate performance, using an instrumental-variables approach that allows for sensitivity analysis. The results indicate that managerial ownership, board composition, and Tobin's Q are jointly determined. More importantly, final results are very sensitive to reasonable changes in both the overall model specification and to the set of instruments.

The results strongly suggest that in corporate governance research, sensitivity analysis is essential, results should be interpreted cautiously, and ordinary least squares results should not be casually dismissed.

JEL Classification: C30, D23, G32