Evaluation Corporate Governance Risk: A Fuzzy Logic Approach

Abstract

Assessment of the corporate governance risk of firms is made based on a subjective evaluation of the important attributes that characterize the monitoring mechanisms. The evaluation process relies on the rule of thumb, is inherently characterized by vagueness and imprecision and, is often expressed in terms of the linguistic constructs for the governance variables. This paper explores the possibility of applying fuzzy logic theory for handling vagueness and imprecision that characterize the decision making process. To prevent the exponential growth of rules with a large set of input attributes, hierarchical fuzzy logic framework is developed to carry out the required analysis for arriving at the governance rating of the firms

Keywords: Hierarchical Fuzzy logic, Corporate Governance, Fuzzy Sets

JEL Classification: G34