Approach

Research on corporate governance has expanded greatly in the last few years. However there are gaps in theory, data, empirical methods, and institutional aspects. Surveys reveal significant gaps in our theoretical understanding on some very basic issues. For example, very little theoretical work has been done on the functioning of boards. Significant gaps also exist in research areas on the role of multiple stakeholders and on the dynamics of changes in corporate governance frameworks.

Surveys also reveal large shortcomings in basic data for studying corporate governance. Data gaps exist at various levels. Firm level ownership and financial data, including direct and ultimate ownership data, covering both cash-flow rights and control rights, comparable data on firms’ financial statements, including balance sheet and profits and loss statement, and data on firm stock market performance, including relative equity valuation and rates of return. Corporate governance actions by firms, including the composition of boards, the act of appointment of independent directors, the voluntary adoption of certain corporate governance charters and bylaws, the presence of incentive contracts for managers. Countries’ institutional frameworks, including detailed information on countries’ legal framework, various corporate governance rules, accounting and auditing rules and arrangements, structure and role of financial markets, setup of stock markets, detail on self-regulatory roles, and trading systems.

Deficiencies in these data are hampering the deepening of knowledge on many issues relevant to corporate governance. Scholars elsewhere have been working to develop better data, but in Europe the collective efforts so far have been confined to the area of ownership and control. There is consequently need for more data initiatives.

Studies to date suffer from some methodological deficiencies. Most empirical studies linking corporate governance quality to firm or economic performance suffer from reverse causality, endogeneity and/or sample selection problems. In some cases, standard results have been reversed when other econometric techniques were applied, for example when linking insider ownership to corporate performance. Methodological advances are needed.

Institutional differences and “natural experiments”: Clearly, institutional differences between countries and over time affect the nature and scope of corporate governance issues. While there has been a tendency to focus on institutional similarities, Europe has quite large institutional differences, many of which have not yet been documented. Surprisingly little attention has also been paid to the many “natural experiments” in the form of corporate governance reforms in many European and other countries over the past decade. Identifying both the underlying factors driving the reform changes as well the effects of the changes on economic growth and well-being will help guide reform.

In order to close the gap and advances in State of the Art methodology, ECGTN intends to bring advances in each of these areas:

	While there are many efforts underway to enhance the theoretical foundations of corporate governance, some of these lack feedback from practice and the interaction between various disciplines. Theory, and especially economic and financial theory, needs to take account of institutions, in terms of their impact and how they are created. While traditionally European legal theory is heavily based on insights from case studies, it is often formulated under the influence of sociology and philosophy and in isolation from finance and economics. By having representatives both from academics from a range of disciplines, and from industry, the network will produce the stylized facts that properly inspire new theories. The interaction between economists and legal scholars is expected to produce new theoretical insights in the financial area. The interaction of legal scholars with scholars from finance and economics will bring new theoretical approaches to legal thinking and introduce more quantitatively oriented methods.
	The earlier collective efforts in the area of data on ownership and control have shown the possible gains from a European research network. Today, the need is for more data as well as for more synergy in data collection among researchers. While databases have become more easily available, many are not comparable across countries and are not necessarily available to a larger group of researchers. The network will build the means for greater exchange of data.
	New empirical research will have to address important methodological issues, including the simultaneity and endogeneity of many measures impeding simple inferences about causality from correlations. More structural models will be needed, both at the level of the individual firm as well as at the level of the economy. The network will allow for interaction between researchers with a broad spectrum of backgrounds, including more quantitatively oriented economists and econometricians.
	Institutional differences and “natural experiments”: Testing corporate governance theories requires differences in institutions or changes in institutions. Europe has both a wide variety of corporate governance systems and over the past few years a broad range of corporate governance reform has been pursued. A network operating on a European scale can document these differences, create new databases to capture these differences with their various subtleties, and become a global focus for the study of the causes and effects of policy changes.

Hence, ECGTN has the potential of closing the gap and advancing the international “state of the art”.