Corporate Governance and Firm Value
Scholars have long debated how corporate governance affects firm value. The topics analyzed include, among many others, board composition, proxy access, poison pills, antitakeover statutes, staggered boards, hedge fund activism. Confronted with conflicting arguments, scholars have turned to empirical evidence to resolve the theoretical debates. An approach that has become increasingly popular over the past […]
Marcel Kahan is the George T. Lowy Professor of Law at New York University School of Law, and Emiliano Catan is the Catherine A. Rein Professor of Law at New York University School of Law. This post is based on their recent paper.
Scholars have long debated how corporate governance affects firm value. The topics analyzed include, among many others, board composition, proxy access, poison pills, antitakeover statutes, staggered boards, hedge fund activism.
Confronted with conflicting arguments, scholars have turned to empirical evidence to resolve the theoretical debates. An approach that has become increasingly popular over the past few decades is to measure the effect of governance mechanisms on Tobin’s Q: the market value of a company divided the replacement cost of the company’s assets.
Q regressions come in two variants, cross-sectional and “within firm.” A typical within firm study uses a panel dataset involving many firms that become treated during the sample period to regress firm Q against a treatment indicator, a vector of firm indicators, a vector of time indicators, and possibly other control variables. This research design effectively compares the post-treatment changes in the Q of treated firms to contemporaneous changes in Q in firms for which treatment status has not changed during the same period. If the coefficient estimate for the treatment indicator is positive (or negative), this is taken as evidence that treatment enhanced (or reduced) firm value.
