The influence of internal and external corporate governance on firm value: Evidence from STOXX® Europe 600 index members

Abstract

The purpose of this paper is to analyze the influence of different dimensions of corporate governance quality on the valuation of non-financial firms listed in the STOXX® Europe 600 index over a period from 2012 to 2017. Instead of using a single governance measure that may cause biased estimates, we seek to capture a more holistic perspective on corporate governance. Therefore, we recreate a set of the most frequently cited governance scores in the literature on a common database and carry out a principal component analysis to identify similarities between the scores. Results reveal that our corporate governance scores load on two general factors that we identify to represent internal and external governance quality. After constructing composite governance measures for each of these factors, we find that external (internal) governance is positively (negatively) linked with firm valuation when applying both fixed effects and IV regressions to account for endogeneity. Our findings imply that subsequent studies on the governance-firm value relationship need to include proxies for both external and internal corporate governance quality.

The Impact of Corporate Governance Quality on Firm Value: A Case Study on Corporate Governance Index of Borsa Istanbul

“…It was that the results obtained are related to the studies' outputs Nugroho (2020), Sitorus and Sitorus (2017), Ararat et al (2017), Çelik et al (2017), Yenice and Dölen (2013), Klimczak and Szafranski (2013), Chen et al (2010) in the same direction. However, the results are inversely related to the studies of Stender and Rojahn (2020), Aluchna and Kuszewski (2020), Taufik et al (2018), Kavcar and Gümrah (2017). In addition, the results are neutrally related to studies of Özçelik (2017), Leung, et al (2014), Jia andLian (2013).…”

“…It has been concluded that corporate governance is not effective on both the financial performance of the companies and the value of the company. Stender and Rojahn (2020) argued that a more holistic perspective on corporate governance can be obtained by making biased estimates instead of using a single governance metric. Therefore, they performed a principal component analysis to test the similarities between scores by reconstructing the scores of governance, which are most frequently cited in the literature, in a common database.…”

Firm Value Response to Internal and External Corporate Governance in the Nigerian Stock Market

“…Banks' economic output is largely influenced by board and ownership structure and firm size; this is evidenced in a prior study (Hoque, Islam, & Azam, 2013). Stender and Rojahn (2020) analyzed the various scopes of corporate governance quality and its influence on the evaluation of non-financial listed firms on the STOXX Europe 600 index between 2012 and 2017. They captured a more linear approach to corporate governance by recreating the highly cited governance score from prior literature and performing a principal component analysis to determine correspondences.…”

“…This has been attributed to the organization's thought and decision-making mechanisms, which have long contributed to this growth. It is, therefore, highly possible to infer two significant determinants of firm value, the first of which are the internal components that are under the control of the firm (Stender & Rojahn, 2020), and the second of which represents the external components that are outside the control of the firm. Having a higher firm value and performance should be a vital attribute of well-governed firms (Bhatt & Bhatt, 2017;Ficici & Aybar, 2012; Asian Economic and Financial Review enhancing external control and performance reporting would generate and sustain the degree of trust in companies that are needed to allow financial markets to operate with ease.…”