Corporate Governance Indexes and Valuation: Which Causes Which?

Posted: 26 May 2013 Last revised: 15 Jun 2013

See all articles by Kenneth Lehn

Kenneth Lehn

University of Pittsburgh - Finance Group

Sukesh Patro

Northern Illinois University

Mengxin Zhao

Securities and Exchange Commission (SEC)

Date Written: April 24, 2007

Abstract

Two recent papers document a significant relation between valuation multiples and governance indices during the 1990s. We test whether causation runs from governance to valuation or vice versa. We find that valuation multiples during the early 1980s, a period preceding the adoption of the provisions comprising the governance indices, are highly correlated with valuation multiples during the 1990s. After controlling for valuation multiples during 1980-1985, no significant relation exists between contemporaneous valuation multiples and governance indices during the 1990s. The results are consistent with the hypothesis that firms with low valuation multiples were more likely to adopt provisions comprising the governance indices, not that the adoption of these provisions depresses valuation multiples.

Keywords: Governance, governance index, causality

JEL Classification: G30, G34

Suggested Citation

Lehn, Kenneth and Patro, Sukesh and Zhao, Mengxin, Corporate Governance Indexes and Valuation: Which Causes Which? (April 24, 2007). Journal of Corporate Finance, Vol. 13, No. 5, 2007, University of Alberta School of Business Research Paper No. 2013-232, Available at SSRN: https://ssrn.com/abstract=2269872

Kenneth Lehn

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-2034 (Phone)

Sukesh Patro

Northern Illinois University ( email )

236P Barsema Hall
DeKalb, IL 60115
United States
8157531354 (Phone)

Mengxin Zhao (Contact Author)

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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