The correlation between corporate governance and market value: regime or signal?

Abstract

Purpose – As literatures argue that managers’ personalities will affect both corporate governance structures and corporate performance, the correlation between them is a mixed result. The purpose of this paper is to separate different routes leading to the mixed correlation, and name the separated routes as regime effect and signal effect. Design/methodology/approach – By theoretical analysis, the authors list three routes leading to the correlation between corporate governance and corporate performance. Routes 1 and 2 show that governance can directly and indirectly change the performance; while route 3 shows that both the governance and performance are results of managers’ personalities, and the governance has no influence onto the performance, which means the correlation led by route 3 is fake. By design a new econometric methodology, this paper separates the mixed correlation between corporate governance and performance, and names the correlation led by routes 1 and 2 as the regime effect and the correlation led by route 3 as signal effect. Findings – By an empirical research on Chinese listed corporates, the authors find that the correlations between Chinese listed corporates’ market value and main corporate governance factors can be separated into regime effects and signal effects; and the authors also find that some factors (Share of Institutional Investors, Share of Real Controller and the Squared, Dummy of Identical CEO and Chairman, Ownership Concentration) only show regime effects, some factors (Separating Extent of Ownership and Controlling Right, Dummy of Provincial State-Owned Firms) only show signal effects, and some factors (Dummy of Republic State-Owned Firms, Scale of Board) show both. What’s more, the authors find out an interesting result that the state-owning has no negative regime effect on China SOEs’ performance but very significantly negative signal effect; in this paper, the authors suggest that this means the key negative factors of Chinese SOEs is not state-owning ownership structure but the managers’ corruption. Practical implications – As only the factors with regime effects can directly and indirectly affect corporates’ performance and the factors with signal effects show that there’re some managers’ personalities affecting both the governance and performance, the separation method in this paper can help shareholders knowing which governance factors will be helpful to improve the performance and which others will show managers’ hard-working or corruption intention. Originality/value – Separate the regime effect and the signal effect from the correlation between corporate governance and performance.

Effect of Corporate Governance Structure on the Financial Performance of Johannesburg Stock Exchange (JSE)-Listed Mining Firms

“…For instance, the correlation between corporate governance and firm financial performance was found by Li et al to be mixed, prompting the conclusion that an executive's personality can affect both corporate governance structures and firm performance [34]. Although many studies show positive and mixed results on the relationship between corporate governance and firm financial performance, it concludes that there is no significant relationship between corporate governance and firm financial performance [35].…”

“…In his study, Azeez [26] found that increasing the number of non-executive directors does not contribute to adding value to the firm. Additionally, Li et al [34] opine that outside independent directors do not contribute to corporate performance unless the board is gender-diversified.…”

Efeito da adoção da Lei Anticorrupção no valor de mercado das companhias brasileiras listadas no Ibovespa

“…Corporate governance is also a factor that may have an effect on the market value (Caixe & Krauter, 2014;Li et al, 2015;Santos et al, 2019), so a dummy was used to capture the entities listed in the new market and a dummy for when the statements were audited by a Big Four audit company. There are theoretical aspects in the literature that indicate that the adoption of sustainable practices has an effect on the firm value, one that predicts that the market tends to recognize sustainable companies and consequently value them, and another that deals with the market that does not recognize since these expenses reflect only expenses to shareholders (Qureshi et al, 2020;Yu & Zhao, 2015), to capture this aspect, a dummy for companies listed on the ISE was included.…”