Corporate Governance and Transaction Cost Economics: A Study of the Equity Governance Structure

Saravia, Jimmy A.; Saravia-Matus, Silvia L.

doi:10.2139/ssrn.2444302

Cited by 3 publications

(2 citation statements)

References 32 publications

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“…Since there is good a priori reason to expect that the opposite could happen, as previous research suggests that corporate governance deteriorates as companies mature (Mueller, 2003, pp. 80-81;Saravia and Saravia-Matus, 2014), the econometric tests performed in the present paper are important and necessary to clarify this question.…”

Section: Resultsmentioning

confidence: 95%

The Weighted Average Cost of Capital Over the Life-Cycle of the Firm: Is the Overinvestment Problem of Mature Firms Intensified by a Higher WACC?

2015

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The weighted average cost of capital over the lifecycle of the firm: is the overinvestment problem of mature firms intensified by a higher WACC? AbstractFirm lifecycle theory predicts that the Weighted Average Cost of Capital (WACC) will tend to fall over the lifecycle of the firm (Mueller, 2003, p. 80-81). However, given that previous research finds that corporate governance deteriorates as firms get older (Mueller and Yun, 1998;Saravia, 2014) there is good reason to suspect that the opposite could be the case, that is, that the WACC is higher for older firms. Since our literature review indicates that no direct tests to clarify this question have been carried out up till now, this paper aims to fill the gap by testing this prediction empirically. Our findings support the proposition that the WACC of younger firms is higher than that of mature firms. Thus, we find that the mature firm overinvestment problem is not intensified by a higher cost of capital, on the contrary, our results suggest that mature firms manage to invest in negative net present value projects even though they have access to cheaper capital. This finding sheds new light on the magnitude of the corporate governance problems found in mature firms.

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Section: Resultsmentioning

confidence: 95%

The Weighted Average Cost of Capital Over the Life-Cycle of the Firm: Is the Overinvestment Problem of Mature Firms Intensified by a Higher WACC?

2015

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“…So far several papers have provided some evidence supporting firm lifecycle theory's claims regarding the different characteristics of young firms compared to mature firms (Garcia, Saravia and Yepes, 2016;Mueller and Yun, 1998;Saravia, 2014;Saravia and Saravia-Matus, 2016). However, to the best of our knowledge no paper has yet tested empirically whether the market equity betas of young firms are larger than those of mature firms while holding other real determinants of systematic risk constant.…”

Section: The Determinants Of Systematic Risk Over the Lifecycle Of Thmentioning

confidence: 96%

The Determinants of Systematic Risk: A Firm Lifecycle Perspective

2016

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This paper investigates how of systematic risk varies over the lifecycle of the firm. If market equity beta is determined by firm characteristics as the literature on the determinants of systematic risk holds, and if those characteristics change over the lifecycle of the firm following a definite pattern as firm lifecycle theory suggests, then market equity beta should change over the lifecycle of the firm following a predictable pattern. Our findings indicate that, holding other determinants of beta constant, the coefficient of systematic risk tends to fall in magnitude following a nonlinear pattern as firm age increases. In addition, we find that the volatility of market equity beta also tends to fall over the lifecycle of the firm. We argue that our main variable of concern, i.e. firm age, proxies for variables that have hitherto been omitted in the literature on the determinants of systematic risk. In particular, we maintain that firm age may proxy for the positive reputation that firms acquire over time with shareholders. This research is useful for both practitioners and researchers in that it may suggest ways to adjust empirical estimates of systematic risk. In addition, our results are important for research on beta forecasting as they show that the length of the stationary interval of betas is shorter for young companies, so that beta forecasting may be less accurate for firms in the early stages of their lifecycle compared to beta forecasting for mature firms.KEYWORDS: Systematic risk, firm lifecycle, intrinsic business risk, financial leverage, operating risk. Quite apart from this regression tendency, it is reasonable to suppose that betas do change over time in systematic ways in response to certain changes in the structure of companies (Blume 1975, p. 785, n. 1).

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The Problem of Causality in Corporate Governance Research: The Case of Governance Indexes and Firm Valuation

Saravia

Saravia-Matus

2015

SSRN Journal

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In recent years the problem of the determination of causality has become an increasingly important question in the field of corporate governance. This paper reviews contemporary literature on the topic and finds that the current approach is to attempt to determine causality empirically and that the problem remains unresolved. After explaining the reasons why it is not possible to attempt to determine causality using real world data without falling prey to a logical fallacy, this paper discusses an approach to deal with the problem. In particular, the paper argues that the appropriate approach for the problem is to build theories, with causality featuring as a part of those theories, and then to test those theories both for logical and empirical consistency. We consider several explanations for the results, but the data do not allow strong conclusions about causality … These multiple causal explanations have starkly different policy implications and stand as a challenge for future research. The empirical evidence of this paper establishes the high stakes of this challenge. If an 11.4 percentage point difference in firm value were even partially "caused" by each additional governance provision, then the long-run benefits of eliminating multiple provisions would be enormous. (Gompers, Ishii and Metrick, 2003, p. 145).

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Corporate Governance and Transaction Cost Economics: A Study of the Equity Governance Structure

Cited by 3 publications

References 32 publications

The Weighted Average Cost of Capital Over the Life-Cycle of the Firm: Is the Overinvestment Problem of Mature Firms Intensified by a Higher WACC?

The Weighted Average Cost of Capital Over the Life-Cycle of the Firm: Is the Overinvestment Problem of Mature Firms Intensified by a Higher WACC?

The Determinants of Systematic Risk: A Firm Lifecycle Perspective

The Problem of Causality in Corporate Governance Research: The Case of Governance Indexes and Firm Valuation

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