55 Pages Posted: 15 Mar 2007 Last revised: 20 Oct 2015
Date Written: August 4, 2011
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: 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
By Alex Edmans