An investigation into the relation between corporate governance and firm value in the U.K

The separation of ownership from control, which characterises the modern firm, necessitates monitoring and inducement mechanisms to ensure that managers maximise shareholder wealth. This study investigates the relation of firm value to these corporate governance mechanisms. The results of the analysis show that there is considerable interdependence between corporate governance and firm structure variables. Most importantly, it appears that the two principal governance mechanisms, managerial equity ownership and the board of directors, are optimally chosen. The methodology employed here suggests that previous work has not fully accounted for the comprehensive and simultaneous nature of the governance process. Weaker evidence is obtained for directors' remuneration and outsider equity ownership. Directors' remuneration is substantially determined by the structure of the firm, and is not strongly related to the performance of the firm. In addition, it appears that large equity investors have different motivations and their presence within a firm's ownership structure may not always be associated with a monitoring function.