Corporate governance mechanisms, accounting results and stock valuation in Canada

The purpose of this paper is to investigate the relationship between corporate governance practices or mechanisms and firm value, as measured by accounting and market data.

Partial least square analyses were performed on a sample of 355 observations from 199 Canadian listed companies. The greater variability allowed under the Canadian principles‐based institutional setting than under the rules‐based USA SOX environment is well‐suited for these tests.

Results suggest that some governance practices, namely the percentage of independent directors on the board, the use of stock options and the frequency of board meetings are significantly and negatively related to the firm's net book value or income. However, most individual governance practices appear to have no significant impact on the firms’ market value.

The potential interrelationships between corporate governance practices and contextual variables are not specifically taken into account, except for the firms’ industrial sector. It is also possible that certain governance mechanisms jointly impact firm value.

This study does not support the current emphasis by regulators on governance practices which mainly concern the monitoring function of the board as opposed to its strategic one.

The paper uses Canada as a laboratory where companies are “invited” rather than “required” to follow corporate governance best practices. This greater corporate discretion in the choice of governance practices provides the variability necessary to test the effect of governance on firm value. Furthermore, in the interest of triangulation, a model seldom seen in the governance literature is used to examine the impact of governance mechanisms on firm value and performance, as measured by accounting and market data.