Exploring the Relationship Between Corporate Governance and Firm Value in the Banking and Finance Sector

Posted: Jun 18, 2023

• Sebastian Harris
• Sebastian Taylor
• Sophia Nguyen

Abstract

The relationship between corporate governance and firm value represents one of the most extensively studied topics in financial economics, yet significant gaps remain in our understanding of how governance mechanisms specifically influence value creation within the banking and finance sector. Traditional approaches to this research question have predominantly relied on linear regression models and standardized governance metrics, often overlooking the complex, non-linear interactions between governance structures and firm performance. The banking sector presents a particularly compelling context for governance research due to its unique regulatory environment, high leverage ratios, and systemic importance to the broader economy. This study addresses several critical limitations in the existing literature by developing an innovative methodological framework that combines machine learning techniques with traditional econometric analysis. We move beyond conventional governance metrics to incorporate both quantitative indicators and qualitative textual analysis of corporate disclosures, thereby capturing the multidimensional nature of governance quality. Our approach recognizes that governance effectiveness cannot be fully captured by simple checklists of governance practices but rather emerges from the complex interplay of formal structures, informal processes, and organizational culture. The research is motivated by three primary research questions that have received limited attention in previous studies. First, how does the relationship between corporate governance and firm value manifest in non-linear patterns that may be obscured by traditional linear modeling approaches? Second, to what extent do qualitative aspects of governance, as reflected in corporate communications and disclosures, complement quantitative governance metrics in explaining variations in firm value? Third, how do institutional and regulatory factors moderate the governance-value relationship within the banking sector across different countries and regulatory regimes?