Corporate governance: measurement and determinant analysis

Abstract

Purpose This paper aims to investigate the determinants of good governance in the US firms. Design/methodology/approach The data are taken from a sample of 624 US listed and non‐financial firms for the period of 1994‐2003. Four indices were constructed that summarize the governance quality: one indice for the board of directors, another one for the board committees, a third one for the audit committee, and a fourth representing an overall or total index. Multiple regressions analyses are used in the study to find the determinants of strong governance. Findings The empirical results show statistically significant and positive associations between each governance index (exception to board index) and firm size, investment opportunities, intangible assets and directors and officers ownership. Furthermore, institutional ownership and external financing needs are positively related to each governance index considered. However, growth opportunities and performance have no significant effect on governance quality. Research limitations/implications Other corporate governance mechanisms could be considered (transparency and disclosure, anti‐takeover provisions and shareholder's rights). Originality/value This paper adds evidence to the important debate about corporate governance ratings. It gives a most comprehensive analysis to date in term of sample size and breath coverage. This paper also offers a new contribution to the debate on the determinants of good governance by isolating the effects of firm characteristics on the board of directors from the effect on compensation and nominating committees and from the effect on audit committee.