THE PROBLEM OF CAUSALITY IN CORPORATE GOVERNANCE RESEARCH: THE CASE OF GOVERNANCE INDEXES AND FIRM VALUATION

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Abstract

In recent years the problem of the determination of causality has become an increasingly important question in the field of corporate governance. This paper reviews contemporary literature on the topic of causality, specifically it examines the literature that investigates the causal relationship between corporate governance indexes and firm valuation and finds that the current approach is to attempt to determine causality empirically and that the problem remains unresolved. After explaining the reasons why it is not possible to attempt to determine causality using real world data without falling prey to a logical fallacy, this paper discusses a traditional approach used in science to deal with the problem. In particular, the paper argues that the appropriate approach for the problem is to build theories, with causality featuring as a part of those theories, and then to test those theories both for logical and empirical consistency.

Keywords: Corporate Governance, Causality, Agency Costs, Firm Valuation, Governance Indexes, Boards of Directors, Entrenchment, Shareholder Rights

Received: 22.06.2017

Accepted: 27.08.2017

How to cite this paper: Saravia, J. A., & Saravia-Matus, S. (2017). The problem of causality in corporate governance research: The case of governance indexes and firm valuation. Corporate Board: role, duties and composition, 13(2), 55-60. https://doi.org/10.22495/cbv13i2art6