The relationship between corporate governance mechanisms and firm value: evidence from the largest Australian firms
Creators: name: HASSAN, HAMIZAH
Publisher: name: RMIT University
Year: 2024

description: The mixed findings in the literature pertaining to the relationship between corporate governance mechanisms and firm value have resulted in the endogeneity issue of the former becoming central to discussions in corporate governance and corporate finance studies. As endogeneity can be in the form of reverse causality and/or in a dynamic sense, this thesis examines the relationships between corporate governance mechanisms that are proxied by ownership concentration and debt and firm value in the largest Australian firms from 1997 to 2008. The study investigates this issue through three different tests. First, the study examines whether there are any causal relationships between ownership concentration, debt and firm value. Second, the study investigates whether ownership concentration, debt and firm value are best treated as a group in order to assess their influence on each other. Therefore, the study assesses their substitutability or complementarity. Third, the study examines whether there are any non-linear relationships between ownership concentration and firm value on the one hand and debt on the other hand, as well as between debt and firm value. In investigating the dynamic endogeneity issue through these tests, the study employs two methodologies: two-way fixed effects (FE) and the two-step system generalised method of moments (GMM).<br><br>In the first test, the study finds a causal relationship between ownership concentration and firm value as well as between debt and firm value. The causality is found to run from firm value to ownership concentration in a negative direction and from debt to firm value also in a negative direction. No causal relationship is found between ownership concentration and debt. However, further investigation by using sub-samples of ownership concentration reveals that there is causality between these two corporate governance mechanisms. It is found that causality runs from ownership concentration to debt in a negative direction. This test finds that firm value causes ownership concentration, thus providing evidence that endogeneity in the form of reverse causality exists. However, in the dynamic sense, it is found that dynamic endogeneity is not an issue in this test. The second test discovers that there is no evidence that ownership concentration, debt and firm value are effective as a group. Therefore, the study fails to identify their substitutability or complementarity. Furthermore, this test finds that dynamic endogeneity is not an issue in influencing ownership concentration, debt and firm value when they are tested as a group. In the final test, the study finds that there is a non-linear relationship between ownership concentration and firm value. This non-linear association is found to have an influence on the non-linearity between ownership concentration and debt. Further, the study also finds that debt and firm value are non-linear. It is found that the dynamic endogeneity issue does influence the non-linearity functions of ownership concentration but not the non-linearity functions of debt. The thesis concludes that dynamic endogeneity is not a serious issue in influencing the relationship between corporate governance mechanisms and firm value in the largest Australian firms.<br>