Sample Thesis Paper
Following Himmelberg et al. (1999), we explore the determinants of firm-level governance controlling for firm-specific contracting environment. Himmelberg et al. argue that contracting environment influences the optimal level of managerial shareholdings. This argument can be easily transferred to our corporate governance scorecard as a comprehensive measure of control.
Similar to their setup, we make a comparison among the pooled data without fixed effects, panel with industry fixed effects and panel with firm fixed effects empirically. Briefly, estimates from pooled data depend only on the variation in average corporate governance scorecard and performance levels across firms and will not utilize the variation over time in these variables for individual firm. It is achieved by pooling all data and implicitly forcing equal intercepts. In contrast, estimates from panel with firm fixed effects will depend only on the variation over time in corporate governance scorecard and performance for each individual firm, and will not utilize the variation in variables across firms. Similarly, panel with industry fixed effects assumes unobserved heterogeneity is constant for the same industry instead of same firm. Such measure is noisier than the measure with firm fixed effects. Including models of panel with industry fixed effects is for the purpose of completion, but our main focus is on pooled data and panel with firm fixed effects.
Besides for the purpose of controlling for unobserved firm heterogeneity, we use fixed effects to detect the different impact of within- and between- variation on governance choices and firm performance. Specifications using pooled data serve as a base line to examine cross-section differences; whereas, we use fixed effects to investigate the changes of governance in specific firms over time. It is interesting to discover whether it is the absolute ranking of the corporate governance or the improvement of corporate governance over time that has more influence on performance.