External Financing Needs, Corporate Governance, and Firm Value

16 Pages Posted: 7 Jun 2010

See all articles by Wei-Peng Chen

Wei-Peng Chen

National Chiao-Tung University

Huimin Chung

National Chiao-Tung University - Graduate Institute of Finance

Tsui-Ling Hsu

affiliation not provided to SSRN

Soushan Wu

Securities & Futures Institute

Abstract

We set out in this study to explore the overall impact of external financing needs on corporate governance and firm value, arguing that external financing needs have extremely important impacts on corporate governance, essentially because external financing can prove to be very costly, largely as a result of asymmetric information. Thus, we suggest that improvements in corporate governance of firms with external financing needs could help to reduce costs of outside equity financing.

Our results reveal that it is in fact firm valuation that has an effect on governance practices, as opposed to the reverse, and that external financing needs appear to strengthen the influence of the quality of corporate governance practices on firm value.

The external forces considered in this study are product market competition, investment opportunities, and external financing needs, with particular emphasis being placed upon the impact of external financing needs, since this relates directly to outside shareholders. Given that poor corporate governance practices signal higher asymmetric information costs, and thus, lead to an increase in the costs of raising external capital, it is important to gain a comprehensive understanding of the impact of external financing needs on firm value and corporate governance.

Our results demonstrate the important implications that corporate governance practices have for those firms with a particularly strong need for external equity, and the fact that external financing needs provide incentives for firms to seek out ways of making improvements to the overall quality of their corporate governance practices.

Suggested Citation

Chen, Wei-Peng and Chung, Huimin and Hsu, Tsui-Ling and Wu, Soushan, External Financing Needs, Corporate Governance, and Firm Value. Corporate Governance: An International Review, Vol. 18, Issue 3, pp. 234-249, May 2010. Available at SSRN: https://ssrn.com/abstract=1621093 or http://dx.doi.org/10.1111/j.1467-8683.2010.00801.x

Wei-Peng Chen (Contact Author)

National Chiao-Tung University ( email )

East District
Taipei 100
Taiwan

Huimin Chung

National Chiao-Tung University - Graduate Institute of Finance ( email )

Hsinchu 300
Taiwan

Tsui-Ling Hsu

affiliation not provided to SSRN

No Address Available

Soushan Wu

Securities & Futures Institute ( email )

9F, 3, Nan-Hai Rd.
Taipei, 10066
Taiwan

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