Governance mechanisms and firm characteristics
- Publication Type:
- Thesis
- Issue Date:
- 2005
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Recent regulatory changes in developed economies have sought to apply
uniform standards for corporate governance following a series of high profile
corporate collapses between 2000 and 2002. The various regulatory responses
raised questions in the governance literature on the appropriateness of a “one
size fits all” approach. However, empirical outcomes in this literature do not
provide a consistent picture on how, or even whether, governance choices vary
with firm characteristics. This thesis addresses the lack in empirical direction
by investigating the discriminatory power of a fundamental firm variable, the
price-to-book ratio (P/B), that is often applied in Australian and other studies
to predict governance outcomes. It evaluates how a joint price-to-book, price-to-
earnings, firm classification (P/B, P/E) captures variations in governance
choices by Australian firms and compares the results with those using a
conventional P/B classification. Choices for two key mechanisms – the level of
independence of the board of directors and the quality of its external auditors,
are examined as they feature prominently in regulatory reforms. The results
show that a joint P/B, P/E classification captures significant differences in the
use of both mechanisms confirming that governance frameworks vary with
firm characteristics. Consistent with expectations, these differences are
recorded for board independence within high and within low P/B firms.
Significant variations are also identified in the choice of auditor quality within
both P/B classes of firms. By enabling a more parsimonious analysis of firm
characteristics through the joint P/B, P/E framework, these results enhance our
understanding of the choice of independent directors and high quality auditors.
They also lend support to the general proposition that a “one size fits all”
governance framework could lead to unnecessary costs for firms as they seek
optimal governance arrangements that suit their specific information
environments.
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