An Integrated Framework of Corporate Governance and Firm Valuation
44 Pages Posted: 1 Aug 2005
Date Written: July 2005
Recent empirical research shows evidence of a positive relationship between the quality of firm-specific corporate governance and firm valuation. Instead of looking at one single corporate governance mechanism in isolation, we construct a broad corporate governance index and apply five additional variables related to ownership structure, board characteristics, and leverage to provide a comprehensive description of firm-level corporate governance for a representative sample of Swiss firms. To control for potential endogeneity of these six governance mechanisms, we develop a system of simultaneous equations and apply three-stage least squares (3SLS). Our results support the widespread hypothesis of a positive relationship between corporate governance and firm valuation.
Keywords: Corporate governance, principal-agent problems, ownership structure, firm valuation, endogeneity
JEL Classification: G12, G32, G34, G38
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