Corporate Governance Indices and Construct Validity

14 Pages Posted: 21 Nov 2017

See all articles by Bernard S. Black

Bernard S. Black

Northwestern University

Antonio Gledson De Carvalho

Fundacao Getulio Vargas School of Business at Sao Paulo

Vikramaditya S. Khanna

University of Michigan Law School; European Corporate Governance Institute (ECGI)

Woochan Kim

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

B. Burcin Yurtoglu

WHU - Otto Beisheim School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

Manuscript Type. Conceptual and empirical. Research Question/Issue. Many studies of firm‐level corporate governance rely on aggregate “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. We conduct an exploratory analysis of how researchers can address the “construct validity” of firm‐level governance indices, which poses a major challenge to all studies that rely on these indices. Research Findings/Insights. We assess the construct validity of governance indices for four major emerging markets (Brazil, India, Korea, and Turkey), developed in prior work. In that work, we built country‐specific indices, using country‐specific governance elements that reflect local norms, institutions, and data availability, and showed that these indices predict firm market value in each country. The use of country‐specific indices puts great stress on the construct validity challenge of assessing how well a governance measure matches the underlying concept. We address here how well these four country‐specific indices, and subindices for aspects of governance such as board structure or disclosure, coherently measure unobserved, underlying actual governance. Theoretical/Academic Implications. We provide guidance on how researchers can address the construct validity of corporate governance indices. Practitioner/Policy Implications. The uncertain construct validity of most corporate governance indices suggests caution in relying on research using these indices as a basis for firm‐level governance changes, or country‐level legal reforms.

Keywords: Corporate Governance indices, construct validity, boards of directors, disclosure, shareholder rights, ownership structure

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 (November 2017). Corporate Governance: An International Review, Vol. 25, Issue 6, pp. 397-410, 2017, Available at SSRN: https://ssrn.com/abstract=3074837 or http://dx.doi.org/10.1111/corg.12215

Bernard S. Black (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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 S. Khanna

University of Michigan Law School ( email )

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United States
734-615-6959 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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Belgium

Woochan Kim

Korea University Business School ( email )

LG-POSCO Bldg #324
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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 the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Asian Institute of Corporate Governance (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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