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Endogeneity and the Dynamics of Internal Corporate Governance

TL;DR: In this paper, the authors use a well-developed dynamic panel GMM estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structures.
Abstract: We use a well-developed dynamic panel GMM estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structure. The estimator incorporates the dynamic nature of internal governance choices to provide valid and powerful instruments that address unobserved heterogeneity and simultaneity. We re-examine the relation between board structure and performance using the GMM estimator in a panel of 6,000 firms over a period from 1991-2003, and find no causal relation between board structure and current firm performance. We illustrate why other commonly used estimators that ignore the dynamic relationship between current governance and past firm performance may be biased. We discuss where it may be appropriate to consider the dynamic panel GMM estimator in corporate governance research, as well as caveats to its use.
Citations
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Journal ArticleDOI
TL;DR: In this article, the tax impact of foreign investors' interests within a host developing economy was examined, and the analysis of the dynamic panel data with a system GMM estimator showed significant positive relationships between foreign investors interests and the measures of corporate tax avoidance among large Malaysian companies.

3,631 citations

Journal ArticleDOI
TL;DR: In this paper, the influence of corporate governance on financial firms' performance during the 2007-2008 financial crisis was investigated using a unique dataset of 296 financial firms from 30 countries that were at the center of the crisis.

1,100 citations


Cites background from "Endogeneity and the Dynamics of Int..."

  • ...…with the crisis period being a unique setting in which the actions of board members mattered.6 6 One common problem for governance studies is that the relation between board characteristics and firm performance may be spurious because they are endogenously determined (Wintoki et al., 2012)....

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Journal ArticleDOI
TL;DR: Wang et al. as discussed by the authors examined the effect of board gender diversity on firm performance in China's listed firms from 1999 to 2011 and found that female executive directors have a stronger positive effect on the firm performance than female independent directors, indicating that the executive effect outweighs the monitoring effect.

709 citations

Posted Content
TL;DR: In this article, the authors investigated whether corporate social responsibility mitigates or contributes to stock price crash risk and found that firms' CSR performance is negatively associated with future crash risk after controlling for other predictors of crash risk.
Abstract: This study investigates whether corporate social responsibility (CSR) mitigates or contributes to stock price crash risk. Crash risk, defined as the conditional skewness of return distribution, captures asymmetry in risk and is important for investment decisions and risk management. If socially responsible firms commit to a high standard of transparency and engage in less bad news hoarding, they would have lower crash risk. However, if managers engage in CSR to cover up bad news and divert shareholder scrutiny, CSR would be associated with higher crash risk. Our findings support the mitigating effect of CSR on crash risk. We find that firms' CSR performance is negatively associated with future crash risk after controlling for other predictors of crash risk. The result holds after we account for potential endogeneity. Moreover, the mitigating effect of CSR on crash risk is more pronounced when firms have less effective corporate governance or a lower level of institutional ownership. The results are consistent with the notion that firms that actively engage in CSR also refrain from bad news hoarding behavior and thus reducing crash risk. This role of CSR is particularly important when governance mechanisms, such as monitoring by boards or institutional investors, are weak.

662 citations


Cites methods from "Endogeneity and the Dynamics of Int..."

  • ...We next apply the dynamic panel GMM approach, which incorporates the dynamic relation between CSR and crash risk while accounting for other sources of endogeneity (Wintoki et al., 2012)....

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Journal ArticleDOI
TL;DR: In this article, the authors evaluated the performance of dynamic panel models on corporate finance data, in which the dependent variable may be clustered or censored and independent variables may be missing, correlated with one another, or endogenous.
Abstract: Dynamic panel models play a natural role in several important areas of corporate finance, but the combination of fixed effects and lagged dependent variables introduces serious econometric bias. Several methods of counteracting these biases are available and these methodologies have been tested on small datasets with independent, normally-distributed explanatory variables. However, no one has evaluated the methods’ performance with corporate finance data, in which the dependent variable may be clustered or censored and independent variables may be missing, correlated with one another, or endogenous. We find that the data’s properties substantially affect the estimators’ performances. We provide evidence about the impact of various data set characteristics on the estimators, so that researchers can determine the best approach for their datasets.

574 citations

References
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Book
01 Jan 2001
TL;DR: This is the essential companion to Jeffrey Wooldridge's widely-used graduate text Econometric Analysis of Cross Section and Panel Data (MIT Press, 2001).
Abstract: The second edition of this acclaimed graduate text provides a unified treatment of two methods used in contemporary econometric research, cross section and data panel methods. By focusing on assumptions that can be given behavioral content, the book maintains an appropriate level of rigor while emphasizing intuitive thinking. The analysis covers both linear and nonlinear models, including models with dynamics and/or individual heterogeneity. In addition to general estimation frameworks (particular methods of moments and maximum likelihood), specific linear and nonlinear methods are covered in detail, including probit and logit models and their multivariate, Tobit models, models for count data, censored and missing data schemes, causal (or treatment) effects, and duration analysis. Econometric Analysis of Cross Section and Panel Data was the first graduate econometrics text to focus on microeconomic data structures, allowing assumptions to be separated into population and sampling assumptions. This second edition has been substantially updated and revised. Improvements include a broader class of models for missing data problems; more detailed treatment of cluster problems, an important topic for empirical researchers; expanded discussion of "generalized instrumental variables" (GIV) estimation; new coverage (based on the author's own recent research) of inverse probability weighting; a more complete framework for estimating treatment effects with panel data, and a firmly established link between econometric approaches to nonlinear panel data and the "generalized estimating equation" literature popular in statistics and other fields. New attention is given to explaining when particular econometric methods can be applied; the goal is not only to tell readers what does work, but why certain "obvious" procedures do not. The numerous included exercises, both theoretical and computer-based, allow the reader to extend methods covered in the text and discover new insights.

28,298 citations

Journal ArticleDOI
TL;DR: In this article, the generalized method of moments (GMM) estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
Abstract: This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.

26,580 citations


"Endogeneity and the Dynamics of Int..." refers background or methods in this paper

  • ...This dynamic panel GMM estimator, developed in a series of papers by Holtz-Eakin, 2 Newey, and Rosen (1988), Arellano and Bond (1991), Arellano and Bover (1995), and Blundell and Bond (1998), improves on ordinary least squares (OLS) or traditional fixed-effects estimates in at least one of three…...

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  • ...Newey, and Rosen (1988), Arellano and Bond (1991), Arellano and Bover (1995), and Blundell and Bond (1998), potentially improves on ordinary least squares (OLS) or traditional fixed-effects estimates in at least one of three important ways....

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  • ...Arellano and Bond (1991) suggest two key tests of this assumption....

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  • ...(1988) and Arellano and Bond (1991), and further developed in a series of papers including Arellano and Bover (1995) and Blundell and Bond (1998). It exploits the dynamic relationships inherent in our explanatory variables....

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  • ...(26) Arellano and Bond (1991) suggest that we can use these orthogonality conditions to obtain a GMM estimate of β ....

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Report SeriesDOI
TL;DR: In this paper, two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator are presented. But both estimators require restrictions on the initial conditions process.

19,132 citations

Journal ArticleDOI
TL;DR: In this paper, a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables is presented. But the authors do not consider models with predetermined variables that have constant correlation with the effects.

16,245 citations


"Endogeneity and the Dynamics of Int..." refers background or methods in this paper

  • ...Arellano and Bover (1995) and Blundell and Bond (1998) suggest that we can improve on the “difference” GMM estimator using the “system” GMM estimator (see Section 3....

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  • ...Arellano and Bover (1995) and Blundell and Bond (1998) suggest that we can improve on the “difference” GMM estimator using the “system” GMM estimator (see Section 3.3 for a discussion of the shortcomings of the “difference” estimator)....

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  • ...This dynamic panel GMM estimator, developed in a series of papers by Holtz-Eakin, 2 Newey, and Rosen (1988), Arellano and Bond (1991), Arellano and Bover (1995), and Blundell and Bond (1998), improves on ordinary least squares (OLS) or traditional fixed-effects estimates in at least one of three…...

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  • ...In additional (untabulated) analysis, we carry out the dynamic GMM regression using the “forward” orthogonal deviations transformation, proposed by Arellano and Bover (1995). Instead of first-differencing, as in the regular system GMM estimator, it subtracts the average of all future available observations of a variable....

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  • ...In additional (untabulated) analysis, we carry out the dynamic GMM regression using the “forward” orthogonal deviations transformation, proposed by Arellano and Bover (1995)....

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Journal ArticleDOI
TL;DR: In this paper, the authors present evidence consistent with theories that small boards of directors are more effective, using Tobin's Q as an approximation of market valuation, and find an inverse association between board size and firm value in a sample of 452 large U.S. industrial corporations.

6,611 citations


"Endogeneity and the Dynamics of Int..." refers background or result in this paper

  • ...Yermack (1996) and Coles, Daniel, and Naveen (2008) do find a positive relation in some specifications....

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  • ...This finding is similar (in both direction and magnitude) to those obtained by a number of prior studies including Yermack (1996), Eisenberg et al. (1998), and Bhagat and Black (2002)....

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  • ...Most (e.g., Yermack, 1996; Eisenberg, Sundgren, and Wells, 1998) report a negative relation between firm performance and board size....

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  • ...The static OLS estimate also suggests a negative relation between board independence and firm performance (−0.0266, t = −3.56), similar to that reported in a number of prior studies including Yermack (1996), Klein (1998), and Bhagat and Black (2002)....

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