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Corporate Governance Indices and Construct Validity

41 Pages Posted: 14 Sep 2016 Last revised: 21 Nov 2017

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Antonio Gledson De Carvalho

Fundacao Getulio Vargas School of Business at Sao Paulo

Vikramaditya S. Khanna

University of Michigan Law School

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asia Corporate Governance Institute (AICG)

B. Burcin Yurtoglu

WHU - Otto Beisheim School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2017

Abstract

See the full text for the structured abstract requested by the journal. The abstract for the working paper is below:

We conduct an exploratory analysis of how researchers can address the issue of “construct validity”, which poses a major challenge to all studies of the effect of corporate governance on firm performance. Many corporate governance studies rely on aggregate governance “indices” to measure underlying, unobserved governance. But we are not confident that we know how to build these indices – often we are unsure both as to what is “good” governance, and how one can proxy for this vague concept using observable measures. These are construct validity questions.

As the basis for analysis, we begin with our prior work, in which we build governance indices in four major emerging markets (Brazil, India, Korea, and Turkey). In that work, we argue that one must build country-specific indices, which use country-specific elements that reflect local norms, local institutions, and local data availability. We show that these similar-but-not-identical indices predict firm market value in each country and when pooled across countries, in firm fixed-effects (FE) regressions with extensive covariates. This approach puts great stress on the construct validity challenge of assessing how well a governance measure matches the underlying concept. We address here what can be said about how well these four country-specific indices, and subindices for aspects of governance such as board structure or disclosure, measure unobserved, underlying actual governance quality.

The Online Appendix to accompany this article is available at http://ssrn.com/abstract=2973326

Keywords: Corporate governance indices, construct validity, Brazil, Korea, India, Russia, Turkey, boards of directors, disclosure, shareholder rights, ownership structure

JEL Classification: G18, G30, G34, G39, K22, K29

Suggested Citation

Black, Bernard S. and De Carvalho, Antonio Gledson and Khanna, Vikramaditya S. and Kim, Woochan and Yurtoglu, B. Burcin, Corporate Governance Indices and Construct Validity (October 1, 2017). U of Michigan Law & Econ Research Paper Forthcoming; Corporate Governance: An International Review, 2017 Forthcoming; U of Michigan Law & Econ Research Paper; Northwestern Law & Econ Research Paper No. 13-05; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 483/2016. Available at SSRN: https://ssrn.com/abstract=2838273 or http://dx.doi.org/10.2139/ssrn.2838273

Bernard Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)

European Corporate Governance Institute (ECGI)

Brussels
Belgium

Antonio Gledson De Carvalho

Fundacao Getulio Vargas School of Business at Sao Paulo ( email )

R. Itapeva, 474 - 7o. andar
Sao Paulo 01313-902
Brazil
+5511 3281-7767 (Phone)

Vikramaditya Khanna

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-615-6959 (Phone)

Woochan Kim

Korea University Business School ( email )

LG-POSCO Bldg #524
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asia Corporate Governance Institute (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

B. Burcin Yurtoglu

WHU - Otto Beisheim School of Management ( email )

Chair of Corporate Finance
Burgplatz 2
Vallendar, 56179
Germany
+49 261 6509-721 (Phone)
+49 261 6509-729 (Fax)

HOME PAGE: http://www.whu.edu/forschung/fakultaet/finance-group/corporate-finance/

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