Other Econometric and Statistical Tests

Additional econometric and statistical tests in this study include factor analysis, tests for incremental regression, tests for endogeneity, tests for complementarities of corporate governance instruments for developing and developed financial markets and descriptive statistics for the study. These tests are discussed as follows.

4.4.1 Factor Analysis

In the current study about the relationship between the value of a firm and corporate governance, the correlation of the important variables in the models for developing and developed financial markets will be analysed using factor analysis. The variable having the highest correlation with the dependent variable (Tobin’s Q) will also be highlighted.

4.4.2 Incremental Regressions

As discussed in Chapter 3, incremental regression revealing the importance of an individual variable in affecting the value of a firm will be performed by removing the individual variables from the model and capturing the effect on the R squared. These tests will highlight the importance of individual variables in affecting the dependent variable (Tobin’s Q) in the CGVF models.

4.4.3 Endogeneity Tests

According to Bhagat and Jefferis (2002), corporate governance instruments affect the value of a firm. Conversely, the value of a firm can affect different corporate governance instruments. Demsetz and Lehn (1985) also argue that ownership concentration can be determined by the characteristics of a firm as majority shareholders affect the value of a firm and the value of a firm can also affect the composition of shareholding.

Similarly, Bhagat and Black (2002) argue that ownership structure could be endogenous as superior stock performance leads to more shares being held by the management and blockholders. The higher performance of the firm triggers the prices of options and shares held by management and shareholders. The shareholding can affect the value of a firm as they have incentive to monitor and can decrease information asymmetry by aligning their interests with the shareholders. The decrease in the information asymmetry leads to an improvement in the value of a firm.

The literature on the corporate governance suggests that the relationship between corporate governance and the value of a firm is affected by the endogeneity among the corporate goverance variables. Larcker, Richardson and Tuna (2004) find a weak relationship between the value of a firm and corporate governance. Similarly, Bauer, Gunster and Otten (2003) do not find any relationship between the value of a firm and corporate governance variables. They argue that lack of a significant relationship between these variables is due to endogeneity and selection bias among the variables.

The endogeneity in regression makes the coefficient of variables inefficient and unreliable affecting the robustness of the result of the hypotheses. The endogeneity among the variables in this study will be tested and suitable treatment will be given to solve this problem.

4.4.4 Tests for Complementarities of Corporate Governance Instruments

As discussed in Chapter 3, tests for the complementarities of corporate governance instruments in affecting the value of a firm will be conducted in this study. In the individual models for developing and developed financial markets, the complementarities between both internal corporate governance instruments (board size and CEO duality) will be tested. In contrast, the tests of complementarities of both internal (board size and CEO duality) and the external corporate governance mechanism (procedures) will be performed in the CGVF model for cross-market analysis.

Suggested Relationship among the Edgeworth Complements

As mentioned in Chapter 3, we support the internal corporate governance mechanism (board size and CEO duality) to be the Edgeworth complement of the external corporate governance mechanism (procedures). Similarly, we support the external corporate governance mechanism (procedures) to be the Edgeworth complement of the internal corporate governance mechanisms (board size and CEO duality) in developing and developed financial markets. We also support the internal corporate governance mechanisms to be the Edgeworth complement of each other.

The results concerning the complementarities of corporate governance instruments will allow us to make a value maximisation policy for shareholders in developing and developed financial markets.

4.4.5 Descriptive Statistics

As discussed in Chapter 3, descriptive statistics will be used to analyse the basic features of the data in this study. An analysis of individual corporate governance

variables is also performed to examine the variables relevant for corporate governance and the value of a firm on an individual basis. The descriptive statistics used in this study consist of mean to show central tendency, and maximum and minimum values of the relevant variables to show the range.

The mean of the variables in this study will be calculated to compare the central tendencies of the variables of developing and developed financial markets and is calculated as follows: X = 1 1 . n i i X n

∑

where:n = number of the observations; and

1 n i i X =

∑

The maximum value will be used to compare the highest value of the variable in developing and developed financial markets. In contrast, the minimum value will be used to compare the lowest value of the variable in these financial markets.

In the case of the firms of developing market, a higher number of dual firms, and higher mean values of board size and gearing are expected. In contrast, higher mean values of the market capitalisation, return on total assets and Tobin’s Q are expected in case of firms in a developed market.

Computer Programs Used in the Current Study

A statistical package, E-views, will be used to calculate the results for the factor analysis and descriptive statistics for the CGVF models for developing and developed financial markets. Multiple regressions, tests of complementarities, tests for endogeneity, and incremental regressions will be performed with the help of Eviews software.