Board monitoring and firm performance: Controlling for endogeneity and multicollinearity

Abstract

Prior corporate governance studies have resulted in inconsistent findings on the significance of relationships between combinations of board monitoring characteristics and firm performance, due to a failure to properly control for endogeneity and multicollinearity problems inherent in the multivariate analysis of their data. In this study, panel data of the top 500 listed companies from the Australian Stock Exchange is used over three years. Results reveal that all but one of the five board characteristics and seven board committee characteristics considered in this study are significantly related to both return on assets and earnings per share in each of the three years. It is concluded that results in this study are much stronger and more consistent than prior governance-performance studies because the structural equation modelling and lagged measures of performance used are able to control for endogeneity and multicollinearity.