The Corporate Governance Program

Corporate governance, investment, and growth

Existing research on the governance-performance interaction mostly ignores the intermediate variables between the governance mechanisms and the ultimate wealth effects. The purpose of this project is to address this issue by studying how corporate governance affects the firm's decision making in areas such as innovation, investment, and employment.

There are several reasons why intermediate variables between governance and wealth deserve special attention. For instance, a firm may have a high
Tobin's Q not because it is innovative, but because it captures rents based on preferential access to petroleum reserves. In such cases, insights into the governance-innovation relationship is not gained by linking governance characteristics to Tobin's Q, but rather to innovation measures like R&D, investments, employment, and marketing expenses. Similarly, a firm may have a high Tobin's Q not because it employs idle hands when unemployment is high, but because it lays off workers and replaces them with new technology. Thus, employment figures may be important for policy makers who want to understand how governance characteristics like owner presence on the board influences the firm's hiring and firing decisions.

Building on the framework from our earlier governance-performance analysis, this project will relate a firm-specific index of corporate governance quality to variables which capture key drivers of economic performance, such as investment and hiring decisions.

We spent 2004 designing the empirical analysis and collecting the data. The empirical anaysis was carried out in 2005. Here is the first version of the working paper: