Other than focusing on one or two separate variables for corporate control, recently there has been increasing number of studies that employ corporate governance scorecard as a comprehensive measure to examine the agency problem. It has the advantage to implicitly incorporate either the substitutive or complementary effect of variety of governance practices into one study. The empirical literature on the relationship between firm value and corporate governance scorecard usually analyzes either inter-country difference or inter-firm variation within a country. The most prominent example of studies on inter-country difference is LaPorta et al. (2002), who investigate differences in governance standards among twenty seven countries. Their evidence shows that firms incorporated in countries with better governance standards tend to have higher valuations. Examples of studies investigating inter-firm variation within one country are Drobetz et al. (2003) for Germany, Gompers et al. (2003) and Marry and Stangeland (2003) for the U.S., Klapper and Love (2004) for fourteen emerging markets, Durnev and Kim (2002) for twenty seven countries, Bauer et al. (2003) for the EMU and the U.K., Black et al. (2002) for Korea, Black (2001) for Russia, and Callahan et al. (2003) for Fortune 1000 firms. The results appear to confirm a positive relationship between governance standards and firm value. More importantly, the relationship seems to be stronger in countries with less developed standards.
To the best of our knowledge, Klapper and Love (2004) and Durnev and Kim (2002) are the only two research that investigate the determinants of corporate governance scorecard. Overall Klapper and Love (2004) find that firm-level governance is correlated with firm size, sales growth and assets composition. Moreover, they report that good governance is positively correlated with market valuation and operating performance. Simliarly, Durnev and Kim (2002) report higher disclosure level and in turn higher market valuation for firms with greater growth opportunities, greater needs for external financing, and more concentrated cash flow rights. Our study differs from theirs in the following ways: Firstly, we use time-varying governance scorecard to control unobserved firm heterogeneity with fixed effects. Secondly, we broaden governance measurements with governance scorecard as well as shareholding variables. Finally, we explicitly put governance mechanisms into a simultaneous equation system to address the endogeneity problem.
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