Do corporate governance initiatives lead to firm performance or vice versa? A cause-and-effect analysis Online publication date: Mon, 08-Aug-2022
by B. Rajesh Kumar; K.S. Sujit
International Journal of Corporate Governance (IJCG), Vol. 13, No. 1, 2022
Abstract: The study examines if strong corporate governance initiatives lead to wealth creation for firms or do firms with superior performance tend to adopt strong corporate governance initiatives. The study uses the 3SLS system estimation based on a sample of 4,888 firms. The direction of causality is from corporate governance initiatives to valuation effects. Investments by strategic investors in a firm is a determinant of value creation for the firm. Firms with high agency costs tend to adopt more initiatives for best corporate governance practices. Firms with strong measures for shareholder equality treatment and anti-takeover defence mechanisms have a large concentration of shareholder holding by investors. The implication of the finding that good corporate governance leads to improved valuation is that firms can focus on investments in strong corporate practices for value creation while policymakers can create an environment for sustainable initiatives by supporting optimal corporate governance practices.
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