An Empirical Study on the Endogeneity of Corporate Governance Mechanisms and Firm Performance

The relationship between governance mechanisms and firm performance is always a focus problem in the corporate governance. The existed studies ignored many mechanisms’ integrated effect and its endogeneity, only established one equation to study relationship between governance mechanisms and firm performance. Consider about endogeneity, simultaneous equations model were presented to capture the interrelationships between the six control mechanisms and firm performance. Then, ordinary least square and two-stage least square estimated the equations with data of two exchanges during the period 2002–2004 in a sample of 1,721 firm years. The results showed that there were endogeneity issue in the relationship between governance mechanisms and firm performance. In the end, the conclusion is applied to suggest policy implications of China’s economic reform.