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.
Highlights
In corporate governance literature, a wide range of research has been conducted in examining relations of board characteristics and firm performance, corporate events, or another firm governance structures
Gaussian copula marginal regression (GCMR) captures the relationship between marginal cumulative distributions, where the correlation matrix of an error term is estimated as an autoregressive moving-average (ARMA) time series model and the error dependence structure is expressed in the correlation matrix of a multivariate Gaussian distribution [25,26]
Where Tobin’s Q represents firm value, computed annually, X is an explanatory variable representing board characteristics, and A is the control for firm accounting information
Summary
A wide range of research has been conducted in examining relations of board characteristics and firm performance, corporate events, or another firm governance structures. Authors investigate an impact of a specific board characteristic on an overall measure of firm performances, such as Tobin’s Q [1,2,3], those surrounding corporate events, such as CEO turnover [4,5,6], or another corporate governance structure, an executive compensation [7,8,9]. The presence of outside directors, is typically considered to strengthen director monitoring of managers and increase firm value [4,5,13,14]. Bhagat and Black [11] find no association between board independence and Tobin’s Q, which is a proxy for firm value, whereas Yermack [3] finds a negative association
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