Sustainable Causal Interpretation with Board Characteristics: Caveat Emptor

Abstract

The study of a causal interpretation of board and firm characteristics, that is, a hidden dependence relationship on the causal inference among board and firm characteristics, is an important but unaddressed issue in the corporate governance literature. Using diverse advanced statistical methods and focusing on Tobin's Q, we find that (i) not all board variables previously found to be significant are "robust" to latent variable data analysis, and (ii) those variables that are consistently significant differ markedly in latent structural equation analysis. Our analyses provide researchers interested in board issues with an important caveat: Focusing on the dependence structure of available board variables affected by latent factors may introduce a new horizon in corporate finance.

The Link between Board Structure, Audit, and Performance for Corporate Sustainability

“…The results obtained show that the existence of an audit committee is a favorable premise of a satisfactory ROA level, results in line with the ones obtained by Laing and Weir [44]. We notice that, regardless of the specifics of the national economy or of the particularities of the industries, the regression coefficient corresponding to the Audit Committee variable is positive, in case of all models from (1) to (5), with a significance level of 5%. For the model controlling the fixed effects generated by the particularities of the industry, the marginal effect of the Audit Committee variable cancels the negative marginal effect of the Board size variable.…”

“…However, this factor does not cause a statistically significant marginal effect when looking for stock markets specific effects, given that the probability of the t-test performed on the regression coefficient in model (5), which exceeds the minimum accepted significance level of 10%. However, models (1) to (5) show the model is statistically significant as the probability of F test is under the 1% significance level.…”

“…However, there are researchers who argue the opposite, namely that smaller boards improve performance because they are more effective in achieving performance, emphasizing the idea that communication deficiencies, subjectivism, and the variety of opinions in decision making are the main issues of larger boards. Examples in this case are the studies performed by Franken and Cook [23], Kim et al [5], Felicio et al [24], and Garefalakis et al [25]. Therefore, we consider that board size has a significant impact on financial performance and the first hypothesis that we tested was: Hypothesis 1 (H1).…”

“…But the results in this domain are not consistent, as there are also studies in which researchers could not identify a significant relationship between the elements of corporate governance and the financial performance expressed by various economic indicators, or their results show a negative relationship between variables. These differences can have several explanations, the results of the empirical research being largely influenced by the particularities of the model, the variables used, and the size of the analyzed sample [5].…”

“…In this context, the purpose of this study was to investigate the influence of corporate governance attributes on financial performance. Hence, the six research hypotheses of our study aimed to determine the extent to which: (1) board size, (2) the number of non-executive directors, (3) CEO duality, (4) gender diversity, namely the presence of women on the board of directors, (5) the existence of the audit committee, and (6) the qualified opinion expressed by the external auditor influenced firm performance. Our research was performed on two levels of analysis, namely at the level of the analysis of the corporate governance mechanisms and tools on the: (i) Return on Assets (ROA), and (ii) Return on Equity (ROE), the most used indicators for determining financial performance [6].…”