The influence of internal and external corporate governance on firm value: Evidence from STOXX® Europe 600 index members

Abstract

The purpose of this paper is to analyze the influence of different dimensions of corporate governance quality on the valuation of non-financial firms listed in the STOXX® Europe 600 index over a period from 2012 to 2017. Instead of using a single governance measure that may cause biased estimates, we seek to capture a more holistic perspective on corporate governance. Therefore, we recreate a set of the most frequently cited governance scores in the literature on a common database and carry out a principal component analysis to identify similarities between the scores. Results reveal that our corporate governance scores load on two general factors that we identify to represent internal and external governance quality. After constructing composite governance measures for each of these factors, we find that external (internal) governance is positively (negatively) linked with firm valuation when applying both fixed effects and IV regressions to account for endogeneity. Our findings imply that subsequent studies on the governance-firm value relationship need to include proxies for both external and internal corporate governance quality.