The role of corporate governance mechanisms on equity overvaluation

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Abstract

This study investigates how corporate governance mechanisms, particularly board characteristics, influence equity overvaluation. We use secondary data of 4,185 firm-year observations spanning 2009 to 2015 across 1,351 publicly listed U.S. firms to estimate a logistic regression model. We focus on governance metrics such as gender diversity, Chief Executive Officer (CEO) duality, independent board members, and board size in relation to overvaluation, primarily measured using the price-to-intrinsic-value ratio. We test Jensen’s (2005) proposition that the solution to overvaluation lies in the board of directors or the governance system of firms. In line with our hypothesis, our results present evidence to show that the governance system, specifically board gender diversity, has a significant and negative relationship with the overvaluation of equity. We do not find any significant association between other governance metrics and overvaluation. Equity overvaluation misinforms investors (Eisdorfer et al., 2019), prompting further examination of firm value factors. This study underscores the significance of governance mechanisms, particularly gender diversity, for equity value. Future research should expand governance metrics and explore diverse contexts to enhance the results’ robustness and applicability across industries and contexts.

Keywords: Corporate Governance, Board Characteristics, Equity, Overvaluation, Agency Theory, Managerial Hegemony

Authors’ individual contribution: Conceptualization — A.O.; Methodology — A.O.; Formal Analysis — A.O.; Investigation — A.O. and J.O.-A.; Data Curation — A.O.; Writing — Original Draft — A.O.; Writing — Review & Editing — A.O. and J.O.-A.; Supervision — A.O. and J.O.-A.; Project Administration — A.O. and J.O.-A.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G30, G32, G34, M40, M41

Received: 16.11.2022
Accepted: 24.10.2023
Published online: 27.10.2023

How to cite this paper: Omar, A., & Owusu-Amoako, J. (2023). The role of corporate governance mechanisms on equity overvaluation. Corporate Governance and Sustainability Review, 7(3), 34–44. https://doi.org/10.22495/cgsrv7i3p3