Research / BFI Working PaperApr 25, 2023

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, including 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 predictive accuracy of models over that of models constructed using only firm characteristics. Our results confirm the challenges in constructing measures of corporate governance with predictive value suggested in prior research. These results also raise doubts about the existence of strong causal effects of corporate governance on firm outcomes studied in prior research.

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