Endogeneity and the Dynamics of Internal Corporate Governance

55 Pages Posted: 15 Mar 2007 Last revised: 20 Oct 2015

M. Babajide Wintoki

University of Kansas - School of Business

James S. Linck

Southern Methodist University

Jeffry M. Netter

University of Georgia - Department of Banking and Finance; University of Georgia Law School

Date Written: August 4, 2011

Abstract

We use a well-developed dynamic panel GMM estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structure. The estimator incorporates the dynamic nature of internal governance choices to provide valid and powerful instruments that address unobserved heterogeneity and simultaneity. We re-examine the relation between board structure and performance using the GMM estimator in a panel of 6,000 firms over a period from 1991-2003, and find no causal relation between board structure and current firm performance. We illustrate why other commonly used estimators that ignore the dynamic relationship between current governance and past firm performance may be biased. We discuss where it may be appropriate to consider the dynamic panel GMM estimator in corporate governance research, as well as caveats to its use.

Keywords: Endogeneity, Corporate Governance, Board Structure, Board Size, Board Independence, Dynamic Panel GMM Estimator

JEL Classification: G32, G34, K22

Suggested Citation

Wintoki, M. Babajide and Linck, James S. and Netter, Jeffry M., Endogeneity and the Dynamics of Internal Corporate Governance (August 4, 2011). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=970986

Modupe Babajide Wintoki (Contact Author)

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

James S. Linck

Southern Methodist University ( email )

Cox School of Business
Dallas, TX 75275
United States
214-768-3933 (Phone)

HOME PAGE: http://cox.smu.edu

Jeffry M. Netter

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States
706-542-3654 (Phone)

HOME PAGE: http://www.terry.uga.edu/finance/facultyprofiles/n

University of Georgia Law School

225 Herty Drive
Athens, GA 30602
United States

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