Manuscript Type: EmpiricalResearch Question/Issue: Prior studies have failed to unequivocally establish a positive relationship between corporategovernance ratings and company performance, although theoretically, we would expect to find one. In this paper, we try to establish whether a positive relationship exists through modeling the relationship more carefully. Research Findings/Insights: After controlling for selection bias and endogeneity simultaneously, we find a significant positive relationship between corporate-governance ratings and performance. However, the strength of this relationship seems to depend on the quality of the institutional environment. Finally, we find that improvements in corporate-governance ratings over time result in decreasing marginal benefits in terms of performance. Theoretical/Academic Implications: Our paper contributes to the literature by showing that improved corporategovernance ratings lead to better performance, but that econometric problems might obscure this relationship. We also show that for a sample of developed countries the institutional environment affects the relationship between governance ratings and performance. Finally, this paper contributes to the literature on the impact, regarding compliance and effectiveness, of codes of good governance. Practitioner/Policy Implications: Our results are relevant for both companies and policy makers. They indicate that companies can improve performance by adhering to good corporate-governance practices. For policy makers, the findings suggest that soft laws and the invisible hand of the market lead to companies improving their corporate governance.

Manuscript Type: EmpiricalResearch Question/Issue: Using the conceptual framework of Aguilera, Filatotchev, Gospel, and Jackson, this study examines the impact of principal-principal agency problems on the quality and effectiveness of corporate governance structures in listed companies from 14 European countries between 1999 and 2003. Specifically, we develop an index on the severity of the agency conflict and investigate whether this index explains the quality of governance structures. We also examine whether, given certain environmental complementarities, this index influences the effectiveness of good governance structures. Research Findings/Insights: Using a simultaneous equations model, we find that the conflict index affects the quality and effectiveness of corporate governance. When agency conflicts are severe, the costs of installing good governance are high for the majority shareholders and the quality is low. Once installed, however, good governance structures complemented with a high-quality disclosure environment leads to higher firm value, especially in companies with a severe agency conflict. Theoretical/Academic Implications: Our study adds to the governance literature by focusing on the costs of installing good governance. Further, it contributes to principal-principal agency studies by examining a number of developed countries and by developing a measure for the severity of the principal-principal conflict. Finally, our study adds to institutional theory by showing how companies' corporate governance choices are affected by the severity of agency conflicts and the way corporate governance is regulated. Practitioner/Policy Implications: Our analyses suggest that regulatory approaches to corporate governance issues should move away from a "one-size-fits-all" policy toward one that takes into account the organizational and environmental context. By demonstrating that the severity of principal-principal agency conflicts results in significant differences in the existence and effectiveness of corporate governance, our empirical evidence can guide regulators in developing new regulations or laws intended to reduce private benefits of control or improve the disclosure environment.

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Various regulatory governance initiatives have strived for board diversity, as diversity stimulates creativity, encourages discussion, and enlarges the board's knowledge base. However, increased diversity results in superior decision-making only when the board is free from conflicts and acts as a cohesive group. In this paper, we extend existing corporate governance research by introducing faultline theory to the board of directors (Lau and Murnighan 1998). The idea is to show how a board's diversity structure can give rise to the formation of subgroups along faultlines. The resulting subgroup formation may, in turn, reduce board effectiveness. Using a sample of U.S.-listed firms between 2008 and 2012, results suggest that boards with strong faultlines are associated with lower firm performance, lower CEO turnover-performance sensitivity, and higher abnormal CEO compensation. Understanding potential unintended consequences of board diversity could be of interest to regulators and companies that plan to appoint new directors to the board. JEL Classifications: G30; G38; D70; M41.

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