Working Paper: NBER ID: w19799
Authors: Dalida Kadyrzhanova; Matthew Rhodes-Kropf
Abstract: Equity overvaluation is thought to create the potential for managerial misbehavior, while monitoring and corporate governance curb misbehavior. We combine these two insights from the literatures on misvaluation and governance to ask 'when does governance matter?' Examining firms with standard long-run measures of corporate governance as they are shocked by plausible misvaluation, we provide consistent evidence that firm performance is impacted by governance when firms become overvalued - overvaluation causes weaker performance in poorly governed firms. Our findings imply that firm oversight is important during market booms, just when stock prices suggest all is well.
Keywords: governance; misvaluation; firm performance
JEL Codes: G30; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Overvaluation (F31) | Weaker Performance (D29) |
| Weak Governance (G38) | Poorer Future Operating Performance (L25) |
| Overvaluation (F31) | Managerial Misbehavior (D73) |
| Strong Governance (G38) | Mitigation of Managerial Misbehavior (G34) |