The governance-performance literature is characterized by its inability to reach a consensus regarding the nature of the relation. We posit that these inconsistent findings are symptomatic of inadequacies in the econometric techniques employed when adjusting for all forms of endogeneity. To test this, we fit a comprehensive model of performance and governance using a range of econometric techniques. Once a dynamic generalized method of moments (GMM) specification robust to all forms of endogeneity is employed, we observe no causal relation between governance and firm performance, suggesting that apparently significant relations uncovered by pooled ordinary least squares (OLS) and fix-effects models are the result of spurious correlations.
We employ Merton's probability of default as a continuous ex-ante measure of the likelihood of firm failure and dynamic panel generalised method of moments to better characterise the relationship between corporate governance and the chance of default. In doing so, we overcome limitations of discrete proxies widely used in previous studies and more completely account for endogeneity issues permeating this area of research. While initial testing designed to facilitate comparison with previous studies suggests a significant relationship between the probability of default and executive pay, board structure and ownership structure, once endogeneity concerns are accounted for, no such relationship remains.
Although the fundamental and technical analysis literatures invest considerable effort in assessing their respective ability to explain share prices, they invariably do so without reference to each other. In this context, we propose an equity valuation model integrating both fundamental and technical analysis and, in doing so, recognize their potential as complements rather than as substitutes. Testing confirms the complementary nature of fundamental and technical analysis by showing that, although each performs well in isolation, models integrating both have superior explanatory power. While our findings relate to the valuation of shares, they also have implications for other valuation exercises. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.
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