The Relationship Between Corporate Governance and Firm Value: A Simultaneous Equations Approach for Analyzing the Case of Spain

50 Pages Posted: 12 Jan 2010 Last revised: 3 Jun 2010

Eloisa Perez de Toledo

MacEwan University

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2010

Abstract

This paper assesses the relationship between the quality of governance and the market value of Spanish publicly traded firms. To address the problem of endogeneity and the possible reverse causality between governance and performance I use simultaneous equations applying three-stage least squares regressions. As a proxy for the quality of governance, a governance index is constructed based on the recommendations of the Spanish Code of Best Practices. The results show an overall positive impact of governance on firm value, but no evidence that firm value influences firm’s governance choices (reverse causality). The findings also support the agency theory by showing a positive impact of board ownership on firm value, which can be interpreted as evidence of the convergence of interest hypothesis. I also find a negative impact of board ownership on the overall firm quality of governance, which can be seen as evidence of a substitution effect between board ownership and a broad set of governance mechanisms and evidence that active shareholders increase their stake in high value firms, probably to profit from the private benefits of control.

Keywords: Simultaneous Equations Models, Corporate Governance, Firm Value

JEL Classification: C31, G34

Suggested Citation

Perez de Toledo, Eloisa, The Relationship Between Corporate Governance and Firm Value: A Simultaneous Equations Approach for Analyzing the Case of Spain (January 10, 2010). CAAA Annual Conference 2010. Available at SSRN: https://ssrn.com/abstract=1535073 or http://dx.doi.org/10.2139/ssrn.1535073

Eloisa Perez de Toledo (Contact Author)

MacEwan University ( email )

Rm 5-225K, 10700 104 Avenue
Edmonton, Alberta T5J 2P2
Canada
17806333342 (Phone)

Paper statistics

Downloads
337
Rank
32,881
Abstract Views
1,356