Corporate governance and performance: Controlling for sample selection bias and endogeneity.

Abstract

Studies investigating the relation between corporate governance and performance find only weak evidence that corporate governance affects performance. One reason could be that these studies fail to control properly for sample selection bias and endogeneity. Without controlling for these problems, the relation between corporate governance and performance is not inferred correctly. With this study, we provide evidence on the influence of endogeneity and sample selection bias on the coefficient of corporate governance. We use panel data for the FTSE Eurotop 300 companies over 5 years, from 1999 to 2003. We find that using a sample of the 300 largest companies induces selection bias in the results. Furthermore, the results show that an endogeneity problem is present. This endogeneity problem is caused by a negative reverse causality between performance and corporate governance. After controlling for both problems the coefficient on corporate governance increases and becomes highly significant, where it is insignificant when we use OLS. The results also show that controlling for both problems at the same time is important as by controlling for just one of these problems the bias is only partially reduced. Furthermore, we find that both problems have an equally large impact on the bias in the coefficient. Overall, our findings indicate that the lack of significant results in prior studies is due to not controlling properly for sample selection bias and endogeneity.Negotiations; performance; Selection bias; Law; Panel data; Trade liberalization;