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Interpreting Empirical Estimates of the Effect of Corporate Governance

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  • Yair Listokin

Abstract

Empirical studies of corporate governance address potential endogeneity problems, but fail to place endogeneity in the context of a model and ignore the possibility of disparate treatment effects across companies. This paper tackles these defects. The model and analysis in the paper demonstrate that: (1) Valid and positive estimates for the effect of governance can only arise if there is random variation in governance and governance is systematically underproduced, or governance is chosen randomly without bias and the randomness under study concerns a subpopulation with below-average governance. (2) Governance models that correct for endogeneity using subsamples of firms, fixed effects, or instrumental variables estimates focus on subpopulations of companies that may have different responses to a governance treatment than the average firm. Copyright 2008, Oxford University Press.

Suggested Citation

  • Yair Listokin, 2008. "Interpreting Empirical Estimates of the Effect of Corporate Governance," American Law and Economics Review, American Law and Economics Association, vol. 10(1), pages 90-109.
    • Handle: RePEc:oup:amlawe:v:10:y:2008:i:1:p:90-109
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    File URL: http://hdl.handle.net/10.1093/aler/ahn005
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    Cited by:

    1. John C. Coates IV, 2012. "Corporate Politics, Governance, and Value Before and After Citizens United," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 9(4), pages 657-696, December.
    2. Yunker, James A. & Melkumian, Alla A., 2010. "The effect of capital wealth on optimal diversification: Evidence from the Survey of Consumer Finances," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 90-98, February.

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