The impact of the 1995 TSE corporate governance guidelines on the performance of Canadian companies : a simultaneous equation approach

This study is aimed at testing the impact of the 1995 Corporate Governance Guidelines adopted by the TSE on the performance of Canadian firms. This is accomplished by modeling the joint determination of three alternative internal agency control mechanisms: board composition, ownership structure and debt, together with firm performance in a simultaneous equation framework employing three-stage least-squares methodology. We find that the balance of forces has shifted in the post guidelines period to an increasing monitoring role attributed to boards of directors as both their composition and size become significant determinants of firm performance (as measured by Tobin's Q). Furthermore, the test performed on a 5-year pooled sample, three years from the pre-guidelines period and two years from the post-guidelines period, shows that the proposals in the Corporate Governance Guidelines adopted by the TSE in 1995 had a positive impact on the performance of these firms. Incorporating a dummy variable in the board composition equation that takes on a value of one after the adoption of the guidelines and zero before, the results from a 3SLS system confirm that the adoption in 1995 of the Corporate Governance Guidelines is associated with an increase in outside representation on the boards. An interaction variable between the above mentioned dummy and the percentage of outsiders in the firm performance equation confirms that TSE regulation prompted a rise in outsiders on boards, which consequently led to a significant improvement in their role as corporate monitors