1. How Much Value Does Corporate Governance Add to a Firm?
S.C. Lee*
Edward Lin**
P.T. Chang*
*Yuan Ze University
**National Chiao-Tung University and University of Adelaide (Australia).

2. Motivation
The importance of Corporate Governance has well been documented for firm value.
La Porta et al. (1998, 2000, 2002) in Law and Finance Literature
Gompers et al. (2003), Brown & Caylor (2006) on the positive relationship between governance measures and firm value.

3. Motivation
Bai et al. (2004), Black et al. (2006), and Choi et al. (2007) for international studies.
However, existing studies tends to be ad hoc and lacks a valuation framework to test the value of corporate governance.
Essentially, what is the intrinsic value of corporate governance?

4. The Ohlson (1995) Model
Based on the Dividend Discount Model, Ohlson (1995) develops a residual income valuation model,
where

5. The Ohlson (1995) Model where and Other information may include
Analyst forecast (Dechlow et al., 1999)
Order backlog (Myers, 1999)
Dividends (Hand and Landsman, 1998)

6. The Ohlson (1995) Model R&D expenses (Callen and Morel, 2005)
Audit and non-audit fees (Brown and Caylor, 2005)
We hypothesize that other information contains a firm’s governance measures.
Our study not only tests the validity of the Ohlson model but more importantly, looks at the intrinsic value of corporate governance.

7. Data We use firms from Taiwan for our study
It contains more information in terms of depth and scope about a firm’s governance practices than the IRRC and ISS. It includes 32 governance measures in 5 categories.
U.S. studies tend to focus on board size and composition after the Enron and Worldcom scandals, and the Sarbanes Oxley Act (Yermack (1996), Cheng (2008), Coles et al. (2008)

8. Data
Other categories of governance for firms in East Asian countries may be more important.
e.g. Divergence between cash flow rights and control rights. (Classens et al., 2002 and Lemmon and Lins 2003)

9. Methodology
Since the Ohlson model is in time-series and both market value and book value exhibit nonstationary behaviour. We use cointegration method.
Essentially, we test if market value is cointegrated with book value, residual income and the governance measures.

10. Table 3

11. Table 3 - continued

12. Table 3 - continued

13. Table 4

14. Table 4 - continued

15. Table 4 - continued

16. Cointegration results

17. Conclusions
Book Value and Residual Income alone cannot adequately explain market value
Adding governance measures of ownership structure and divergence between cash flow rights and control rights account for more variation of stock price value over time.
Governance practises are at least equally important as the accounting factors in explaining market value.