Governance Indices and Valuation Multiples: Which Causes Which?
University of Pittsburgh - Finance Group
Northern Illinois University
Securities and Exchange Commission (SEC)
May 1, 2007
Journal of Corporate Finance, Vol. 13, 2007
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.
Number of Pages in PDF File: 32
Keywords: Governance, governance index, causality
JEL Classification: G30, G34
Date posted: October 2, 2005 ; Last revised: January 27, 2013