Does Adopting High-Standard Corporate Governance Increase Firm Value? An Empirical Analysis Of Canadian Companies

Abstract

Research on the impact of corporate governance on firm value has provided inconclusive results. The findings vary depending on the sample, country of study (regulation, law, shareholder protection, market development, etc.) and methodology employed. Many studies are unable to detect significant connection between corporate governance and firm value.

Unlike the United States, Canada adopts a principles-based approach in corporate governance regulation. Canadian companies are required to disclose whether they comply with the corporate governance guidelines set up by authorities (such as the Toronto Stock Exchange) or explain deviations from the guidelines.

Using panel data from 2004 to 2008 in Canada the empirical analyses in this paper show that the finding on the connection between corporate governance and firm value is sensitive to the methodology employed. Controlling relevant information is crucial to the results. When the data is analyzed in a self-selection framework, it is found that some time-varying unobservable firm characteristics that make firms adopt high-standard corporate governance also increase firm value, and somewhat surprisingly, adopting better corporate governance practices per se seems to decrease firm value. The results support the view that firms use sound corporate governance to signal their favorable private information.