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American Law and Economics Review Advance Access published online on April 16, 2008
American Law and Economics Review, doi:10.1093/aler/ahn005
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© The Author 2008. Published by Oxford University Press on behalf of the American Law and Economics Association. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org

Interpreting Empirical Estimates of the Effect of Corporate Governance

Yair Listokin

Yale Law School

Send correspondence to: Yair Listokin, Associate Professor, Yale Law School, PO Box 208215, New Haven, CT 06520-8215, USA; E-mail: yair.listokin{at}yale.edu.

JEL Classification: K22, G34


  Abstract

Empirical studies of corporate governance address potential endogeneity problems, but fail to place endogeneity in the context of a model and ignore the possibility of disparate treatment effects across companies. This paper tackles these defects. The model and analysis in the paper demonstrate that: (1) Valid and positive estimates for the effect of governance can only arise if there is random variation in governance and governance is systematically underproduced, or governance is chosen randomly without bias and the randomness under study concerns a subpopulation with below-average governance. (2) Governance models that correct for endogeneity using subsamples of firms, fixed effects, or instrumental variables estimates focus on subpopulations of companies that may have different responses to a governance treatment than the average firm.

I thank Ian Ayres, Anne Case, John Donohue III, Daniel Ho, Roberta Romano, Benjamin Sachs, and an anonymous referee for helpful comments and discussions. All errors are my own.


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