Two essays in corporate governance
Wintoki, Modupe B.
MetadataShow full item record
A growing body of research suggests that in general, corporate governance varies across firms in ways that are consistent with value maximization. This implies that there should be no systematic causal relationship between firm value and governance structure. In the first essay, I argue that one reason prior studies have found such a cross-sectional correlation is that they ignore dynamic endogeneity – the idea that a firm’s current performance affects both future governance and future performance. Since theory suggests that a firm’s characteristics and environment affect both performance and governance, ignoring dynamic endogeneity may introduce bias into estimates of the relation between governance and performance. I show how incorporating dynamic endogeneity can improve empirical estimates of the relation between governance and performance. I then test my hypothesis by re-examining the relation between board structure and performance in a panel of over 6,000 firms between 1991 and 2003. I find that: (1) board structure and firm characteristics are systematically related to past performance, and (2) when I control for past performance, simultaneity and unobservable heterogeneity, I find no causal relation between board structure and current firm performance. The Sarbanes-Oxley Act of 2002 and recently modified exchange listing requirements impose uniformly high levels of outside director monitoring on all firms. In the second essay, I examine the cross-sectional effect of these regulations given that firms generally choose value-maximizing governance structures that trade off the firm-specific costs and benefits of outside director monitoring. Using the relative costs and benefits of outside director monitoring as a benchmark, I find significant cross-sectional variation in the wealth effects around the announcement and passage of these regulations. I find that firms which have high monitoring costs and fewer benefits from outside monitoring benefited less from the regulations. In particular, I find that the wealth effects around the passage of these new regulations are positively related to firm size and age, and negatively related to growth opportunities and the uncertainty of the firm’s operating environment. The results suggest that a blanket “one size fits all” governance regulation may be detrimental to certain firms, particularly young, small, growth firms.