Corporate governance: institutional arrangement or market choice?: An analytical framework of simultaneous equations based on causal relationship

摘要

Purpose - The purpose of this paper is to investigate the relationship between corporate governance mechanism and firm value of the listed companies in China. Does the better corporate governance lead to the higher firm value? Or does the higher firm value make it easy to choose a better governance mechanism? Or they affect each other? In other words, this paper tries to answer whether the corporate governance mechanism is only decided by institutional arrangement, or by market choice according to firm value or performance or by the interaction of institutional arrangement and market choice? It tries to answer whether institutional arrangement maximizes the firm value, or an invisible hand pushes them to arrive at its maximum. Design/methodology/approach - This paper establishes an analytic framework of simultaneous equations based on causality, which includes five endogenous variables: ownership of larger shareholders, managerial ownership, director compensation, debt financing and firm value. It adopts 1,644 data samples from 274 Chinese listed companies in Shanghai and Shenzhen Stock Exchange during 2007- 2012 after the non-tradable shares reform. Ordinary least squares (OLS) estimation of single equation, 2SLS and 3SLS estimation of simultaneous equations are respectively done to show the differences of these three kinds of estimations. Findings - The empirical results show that differences exist among OLS, 2SLS and 3SLS estimation. Finally, 3SLS estimation should be adopted because the OLS and 2SLS estimation are biased. There are endogenous relationships between corporate governance mechanism and firm value. Through the 3SLS estimation, it is found that first, ownership concentration and firm value affect each other positively. Second, managerial ownership and firm value affect each other positively; third, director compensation and firm value affect each other negatively, while director compensation and firm performance affect each other positively. Finally, debt financing level and firm value are negatively related to each other. Practical implications - It means that ownership of large shareholders, managerial ownership, director compensation and debt financing in the Chinese listed companies are found to have a root in the interaction between institutional arrangement and market choice. It is also found that adverse selection occurs when creditors loan to the listed companies. Managerial compensation is positively related to accounting profit, but it is negatively related to firm value because managers increase profit due by earning management. This could only increase the accounting profits and obtain huge cash compensation, but not increase firm value and even harm the interests of shareholders. Originality/value - This paper not only shows the difference between OLS and 2SLS estimation but also compares the estimation of 2SLS and 3SLS in terms of empirical methods. It gives answers to the following questions: whether the relationship is one-way causality or bilateral causality between ownership concentration, managerial ownership, director compensation and firm value; whether governance mechanism affects firm value by institutional arrangement, or market drives both of them to strike a balance by an invisible hand. In other words, does it make them arrive at equilibrium through the competitive selection process when shareholders, directors, managers and creditors attempt to maximize themselves of their interests?