Research / BFI Working Paper•Oct 11, 2022
How Important Is Corporate Governance? Evidence from Machine Learning
Ian D. Gow, David F. Larcker, Anastasia A. Zakolyukina
We use machine learning to assess the predictive ability of over a hundred corporate governance features for firm outcomes. We consider financial-statement restatements, class-action lawsuits, business failures, operating performance, firm value, stock returns, and credit ratings. We discover that adding corporate governance features does not improve the models’ predictive accuracy beyond the predictive accuracy captured by firm characteristics. Our results raise doubts about the existence of strong causal effects of corporate governance on a range of firm outcomes studied in prior research.