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Corporate governance and firm value: a study on European financial

institutions

Article in International Journal of Productivity and Performance Management · December 2021

DOI: 10.1108/IJPPM-05-2021-0306

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Corporate governance and firm Corporate

governance
value: a study on European and firm value

financial institutions
Hanen Ben Fatma
Faculty of Economics and Management of Sfax, University of Sfax,
Sfax, Tunisia, and Received 27 May 2021
Revised 8 October 2021
Jamel Chouaibi Accepted 16 November 2021

University of Sfax, Sfax, Tunisia

Abstract
Purpose – The purpose of this paper is to examine the impact of the characteristics of two corporate
governance mechanisms, namely, board of directors and ownership structure, on the firm value of European
financial institutions.
Design/methodology/approach – Using the market-to-book ratio calculated by the Thomson Reuters Eikon
ASSET4 database, this study measures the firm value of 111 financial institutions belonging to 12 European
countries listed on the stock exchange during the period 2007–2019. Multivariate regression analysis on panel
data is used to estimate the relationship between corporate governance attributes, such as board size, board
independence, board gender diversity, ownership concentration and CEO ownership, and the firm value of
European financial institutions.
Findings – The empirical results reveal that board gender diversity and CEO ownership are positively related
to the firm value, whereas board size and ownership concentration are negatively related. Furthermore, the
findings suggest that board independence is insignificantly correlated with the firm value. Regarding the
control variables, the results show that financial institutions’ size, age and legal system are significant factors
in changing the firm value. Nevertheless, financial institutions’ leverage and activity sector are not
significantly correlated with their value.
Originality/value – This research contributes to the literature by providing the significant links between
some corporate governance mechanisms and the firm value of companies from the financial industry,
by addressing the information gap for this critical industry in the context of a developed market like Europe.
Keywords Firm value, Corporate governance, Board of directors, Ownership structure,
European financial institutions
Paper type Research paper

1. Introduction
Firm value is an investor’s perception of a company that is often associated with stocks prices
in the market (Putu et al., 2014). The main objective of the company is to maximize the firm
value, which determines the level of prosperity of its shareholders. According to Ibrahim
(2020), the share price can be interpreted as the market value of the company that can prosper
the shareholder; therefore, the increase of the share price of a company increases the welfare
of its shareholders. In this sense, maximizing the company value is very important because it
also means maaximizing shareholder prosperity that is the main objective of the firm. In
making investment decisions, investors must consider companies that have good company
performance and value. Indeed, the high stock price makes a firm highly valued and affects
market confidence toward the current firm performance; thus, firm value is considered a

The authors would like to thank the Editor and the two anonymous referees of the “International Journal
of Productivity and Performance Management” for their insightful comments that have greatly International Journal of
Productivity and Performance
benefitted the paper. Management
Funding: The author(s) received no financial support for the research, authorship, and/or publication © Emerald Publishing Limited
1741-0401
of this article. DOI 10.1108/IJPPM-05-2021-0306
IJPPM benchmark for investors, where a higher company’s stock price means a higher rate of return
to investors.
Unlike other sectors, financial institutions are more regulated by the government and
international bodies due to their high-capital structure and immense economic contribution to
national development. Consequently, they should maximize their firm value and performance
as the health of the overall economy depends on their performance. We chose to work on
financial institutions because this sector plays a central role in a country’s economic
development process; therefore, these institutions are increasingly required to provide more
information about their financial structure to promote credibility to investors and increase
shareholders’ confidence by maximizing their prosperity.
Previous studies suggest that good corporate governance is one of the essential factors in
improving the firm value. According to Sugosha and Artini (2020), good corporate
governance is a system applied in managing a company with the main objective of increasing
shareholder value in the long run while still taking into account stakeholders’ interests.
Consequently, the implementation of good governance can improve the business environment
and increase the confidence of stakeholders, especially investors, in the company.
Corporate governance mechanisms, particularly board composition and ownership
structure, could be important determinants of firm value. According to prior research, the
board of directors is considered a central internal control mechanism that is likely to monitor
managerial opportunism (Fama and Jensen, 1983). According to Coles et al. (2001), the board of
directors is designated to ensure the alignment of a firm’s activities and its specific objectives.
In this regard, the board has to make sure that top managers behave in a way that provides
optimal value for shareholders. Ownership structure presents another significant aspect of
corporate governance that can be used to reduce agency conflicts within the company,
especially in the distribution of dividends to shareholders (Sugosha and Artini, 2020). Agency
conflicts usually occur between major shareholders and minority ones or between
shareholders and company managers, and can lead to a reduction in firm value. Therefore,
ownership structure will help align managerial interests with those of shareholders; thus,
reducing agency conflicts and increasing firm value (Abdullah et al., 2017).
Several prior studies have focused on specific determinants and underlying factors
influencing changes in firm value in developing and emerging markets (Ou-Yang, 2008; Tui
et al., 2017; Ahmad and Sallau, 2018; Mweta and Mungai, 2018; Endri and Fathony, 2020;
Gerged and Agwili, 2020; Jeroh, 2020). However, there has been relatively limited research on
whether specifics corporate governance attributes affect firm value in the financial sector of
developed markets (Noguera, 2020). Therefore, the present work aimed to investigate
whether specific corporate governance mechanisms are associated with a greater firm value
in the financial sector of developed economies, namely Europe. Few studies focused on firm
value in European countries (Bubbico et al., 2012; Busta et al., 2014; Mintah and Schadewitz,
2019). However, they provide limited empirical evidence on the relationship between
corporate governance and firm value. Hence, we aimed to fill this gap in the literature.
The purpose of our study was to investigate the effect of corporate governance
mechanisms on firm value in European financial institutions. We conducted this study using
a sample of 111 financial institutions from 12 European countries listed on the stock exchange
from 2007 to 2019, and we measured their firm value using the market-to-book ratio
calculated by the Thomson Reuters Eikon ASSET4 database. We found that European
financial institutions have a higher market value, which indicates that they have a good firm
value and an ability to generate greater profits. To examine the impact of the board of
directors and ownership structure characteristics on firm value, we used multivariate
regression analysis on panel data. After controlling for financial institution’s size, leverage,
age, legal system, and activity sector, we found that firm value is higher when a firm has a
smaller and more diversified board. We also found that the more shareholdings the CEO
holds in the firm and the less the major shareholders own shareholdings, the higher the firm Corporate
value is. However, board independence has no significant effect on firm value. governance
The current study makes several contributions to the literature. First, it provides further
evidence on company valuation in a developed setting, namely Europe. Furthermore, it
and firm value
provides an empirical evidence of how governance instruments impact the firm value
especially in financial institutions. More precisely, based on the agency theory and resource
dependency theory, this paper makes an empirical evidence focusing on the links between
board characteristics and ownership structure and value creation. Overall, the findings of this
paper underscore the important role of the board gender diversity and the CEO ownership as
corporate governance mechanisms in the improvement of firm value. Moreover, the outcomes
of this research show that the influence of corporate governance on firm value varies across
financial institutions of different legal system. Finally, the absence of time variation in
company valuation may be problematic. Indeed, identifying the consequences of the
implementation of a corporate governance requires taking into account the dynamic effect of
firm value (the lagged dependent variable, at least). Thus, this paper asserts that the firm
value at period t depends necessarily on the information about the firm value at period t
1,
and the board characteristics and ownership structure. We explore this relationship using the
generalized moment method (GMM), as proposed by Arellano and Bond (1991).
The remainder of the paper is structured as follows. Section 2 discusses the relevant
literature review and hypotheses development. Section 3 describes the research design. Our
empirical results are presented and analyzed in Section 4. The paper ends with some
concluding remarks outlined in Section 5.

2. Literature review and hypotheses development

Prior studies used different theories to examine the factors that affect firm value. In the
present study, the essence of the agency theory and resource dependency theory was adopted
to examine the effects of governance variables, particularly, the board size, board
independence, board diversity, ownership concentration, and CEO ownership on firm value.
From the agency theory perspective, a special relationship proves to persist between
managers as agents and shareholders as principals characterized by the prevalence of
interests between both parties (Vafeas and Theodorou, 1998). However, there could be
significant conflicts among managers and shareholders, who have an opportunistic behavior
concentrating towards gaining personal benefits, leading to higher agency costs in the firms
(Salem et al., 2019). Moreover, agency conflicts arise when managers know more about future
internal information and company prospects than shareholders and other stakeholders.
Thus, to increase the firm value, in the case of agency problems, managers can provide
signals about its conditions to investors through the disclosure of accounting information to
maximize the value of its shares (Mukhtaruddin et al., 2014).
The resource dependency theory focuses on the role of the board of directors in providing
access to resources, such as economic resources, information, skills, knowledge and
recommendations required for the business success (Pfeffer and salancik, 1978). According to
Salem et al. (2019), board members commonly exercising outside hyperlinks, and are engaged
in networks that could undoubtedly affect the enterprise improvement process in conjunction
with its long-time period potentialities. Thus, the integration of corporate governance
structure will ultimately result in the use of resources to attain their maximum output, hence
the appreciation of the firm value (Kiharo and kariuki, 2018).

2.1 Board size and firm value

Board size refers to the total number of directors on the board. It is one of the principal
corporate governance indicators, which plays a crucial role in corporate monitoring and
control (Jensen, 1976). Previous literature, on the effect of board size on firm value reached
IJPPM mixed results. The advocates of small board size believe that, small boards can be more
effective than large ones. They have demonstrated a negative relationship between the board
size and firm value and have provided evidence that smaller boards achieve higher firm value
due to their ability to communicate, coordinate and make decisions more, effectively
(Yermack, 1996; Chahine, 2004; Mak and Kusnadi, 2005; Bawa and Lubabah, 2012; Gill and
Obradovich, 2013; Kumar and Singh, 2012; Thompson et al., 2016; Khan et al., 2017; Salem
et al., 2019; Kao et al., 2019). Accordingly, Yasser et al. (2011) indicated that a limited number of
directors on the board has a positive impact on firm value. Similarly, Zabri et al. (2016) argued
that small boards help make better decisions because of better coordination between the
board members and fewer communication issues, which helps businesses operate more
efficiently and increase their value.
Conversely, the resource dependency theory and agency theory have supported the
proposition that larger board size makes firms more effective and gives them a greater value.
Based on the resource dependency theory, large boards are associated with diversity in
experience, skills, ideas and present an opportunity for relationships and access to resources
which then improves the firm performance (Kiharo and Kariuki, 2018; Waheed and Malik,
2019). Furthermore, the agency theory stated that a large board has more control over top
management and directors can prudently monitor the management performance and duties,
which will eventually increase the firm value (Abdullah et al., 2012). Therefore, several works
(e.g. Ahmed and Hamdan, 2015; Rubino et al., 2016; Yanti and Patrisia, 2019; Mishra and
Kapil, 2018; Rossi et al., 2021) have demonstrated a positive relationship between the board
size and the firm value. In the same vein, Weterings and Swagerman (2012), Kiharo and
Kariuki (2018), Gerged and Agwili (2020), and Noja et al. (2021) indicated that board size is
positively and significantly associated with the firm value in the financial sector.
Based on the above literature review, a positive association between board size and firm
value can be expected. Thus, the following hypothesis is developed:
H1. Board size has a positive and significant effect on the firm value of European
financial institutions.
2.2 Board independence and firm value
An independent board has a majority of outside directors who are not affiliated with the top
executives of the firm and have insignificant or no business dealings with the organization to
dodge potential conflicts of interest (Kiharo and Kariuki, 2018). The presence of independent
directors on the board is considered a fundamental corporate governance mechanism. Salem
et al. (2019) indicated that both the agency and the resource dependency theories show the
positive effect of independent directors on firm value in two different ways. According to the
agency theory, independent directors control and monitor the management, therefore
reducing agency costs. In this way, having a large number of outside directors on the board
could have a positive impact on firm value through service monitoring. Besides, the resource
dependency theory suggests that outsiders are seen as a linking mechanism between the firm
and its environment that may support managers in achieving the various goals of the
organization (Arosa et al., 2013; Kiptoo et al., 2021).
Several studies have investigated the association between board independence and firm
value. Dharmadasa et al. (2014) argue that a board with a high number of independent directors
can control the opportunistic behavior of managers and protect shareholders’ interests. It can
also improve the stock prices of the firm better than a board with many dependent members.
Khan et al. (2017) and Wu (2021) stated that more independent directors on the board give a
positive signal to investors and shareholders that firms are being effectively monitored, which
adds to public confidence and ultimately increases firms’ performance and value. In the same
vein, Khanh et al. (2020) revealed that companies with a large number of independent directors
are more likely to have a reduced difference between the objectives of managers and
shareholders, thus making the company’s operations more efficient and increase its value. For Corporate
the financial sector, Ahmad and Sallau (2018) demonstrated that the presence of independent governance
directors plays a critical role in the release of adequate information, and that a higher proportion
of outside directors on the board leads to higher firm value for listed deposit money banks in
and firm value
Nigeria. Similarly, kiharo and kariuki (2018) showed that board independence has a positive
effect on firm value of listed commercial banks in Kenya and stated that the presence of
independent directors increases the board effectiveness in overseeing management to prevent
fraudulent financial statements. Moreover, Mweta and Mungai (2018) found a positive
association between the presence of independent directors and the market value of insurance
sector companies listed at the Nairobi securities exchange. However, some studies found no
significant link between board independence and firm value (Hermalin and Weisbach, 2003;
Kumar and Singh, 2012; Mukhtaruddin et al., 2014; Asante-Darko et al., 2018). Based on what
preceded, the following hypothesis is formulated:
H2. Board independence has a positive and significant effect on the firm value of
European financial institutions.

2.3 Board diversity and firm value

In the last few years, board gender diversity has become a focal aspect of the corporate
governance field. According to Daily et al. (1999), board gender diversity plays a crucial role in
improving the corporate governance system and the strategic decisions in the boardroom.
Based on the agency theory, gender diversity can increase the effectiveness of board control,
because a more diverse board might be more active in monitoring managers which can
improve board independence (Carter et al., 2003). Galbreath (2016) states that the presence of
women on boards adds unique experiences and fresh perspectives to the board and improves
its governance function, which can enhance the decision-making process. According to the
resource dependency theory, board diversity represents an instrument that may be used by
the management to facilitate access to resources that are critical to the company’s success
(Johnson et al., 1996). Women directors may link the company to central elements in the
external environment. The presence of women directors on boards provides a positive image
that may result in a competitive advantage for a company by allowing it to gain support from
key stakeholders and access valuable resources (Hillman et al., 2007; Knippen et al., 2019).
The majority of previous studies have found that female directors promote firm value.
Ramly et al. (2015) showed a positive association between board diversity and firm value due
to the unique and diversified attributes of board members that are helpful for high-quality
decisions. Terjesen et al. (2016) demonstrated that women directors improve the effectiveness
of boards, based on their innovation and creativity regarding problem-solving, which
enhances corporate value. In the same vein, Salem et al. (2019), Issa et al. (2019), Khanh et al.
(2020), and Dwaikat et al. (2021) assert that female board directors may lead to an increase in
the firm value. Mintah and Schadewitz (2019) found that women directors have a positive
effect on financial institutions value. This implies that female representation in the financial
institutions’ boards can influence decision making and lead to better corporate governance.
Likewise, Noguera (2020) found that female directors have a significant positive association
with a real estate investment trust’s value and that women can be skilled director candidates
who promote the understanding of the marketplace in the boardroom. However, some studies
found a negative relationship between board diversity and firm value (Wang and Clift, 2009;
Anh and Khanh, 2017), and others found no significant link (Rose, 2007; Marimuthu and
Kolandaisamy, 2009). Hence, the following hypothesis:
H3. Board gender diversity has a positive and significant effect on the firm value of
European financial institutions.
IJPPM 2.4 Ownership concentration and firm value
Ownership concentration refers to the proportion of a firm’s shares owned by a given number
of the largest shareholders. It is an important internal corporate governance mechanism that
provides the owner with the right to discipline and monitor management (Freihat et al., 2019).
Ownership concentration may help to mitigate the agency problems between managers and
shareholders since large investors are better able to control manager’s actions than small
owners and recover their money (Shleifer and Vishny, 1997). However, ownership
concentration can lead to agency problems between dominant and minority shareholders
when large shareholders enjoy private benefits of control at the cost of small ones (Saona and
Martin, 2016).
The relationship between ownership concentration and firm value has been a
controversial topic in previous literature. Alimehmeti and Paletta (2012), Vintila and
Gherghina (2014), and Rehman et al. (2020) showed that ownership concentration is positively
related to firm value. This positive association confirms that concentrated ownership implies
an increased capacity for control by major shareholders, which leads to aligning managers
with shareholders’ objective of increasing the value of their shares. Bubbico et al. (2012)
showed that ownership concentration has a positive effect on the firm value of financial
institutions listed on the Italian Stock Exchange and stated that high concentration is
expected to produce high monitoring exercised by majority shareholders over the
management to maximize firm value. Moreover, Oluwagbemiga et al. (2014) indicated a
positive effect of ownership concentration on the firm value of banks listed on the Nigeria
Stock Exchange. However, Thompson et al. (2016) found a positive and non-significant
relationship between ownership concentration and firm value. Nevertheless, Lozano et al.
(2015), Kong et al. (2020), and Tran and Li (2020) showed a non-linear relationship between the
two and demonstrated that at low levels, ownership concentration is associated with an
increase in firm value, but beyond a certain level of concentration the relationship might be
negative. In the same vein, Busta et al. (2014) found that ownership concentration has a
negative effect on the firm value of European banks. They provide evidence that
concentrated ownership above a certain level will allow shareholders with large stakes to
expropriate the wealth of minority ones. Consequently, the agency problem may occur due to
the lack of convergence between majority and minority shareholders’ interests (Vintila and
Gherghina, 2014). Furthermore, Kiharo and Kariuki (2018) have demonstrated the negative
relationship between ownership concentration and firm value of listed commercial banks in
Kenya. Thus, based on what preceded, the following hypothesis is constructed:
H4. Ownership concentration has a positive and significant effect on the firm value of
European financial institutions.

2.5 CEO ownership and firm value

CEO ownership is the percentage of shares owned by the CEO in a company. Previous
literature on the association between CEO ownership and firm value has reached mixed
results. According to Jensen and Meckling (1976), large managerial ownership can reduce
agency cost and increase firm value by aligning manager’s benefits with those of the
shareholders. Rizqia et al. (2013) and Hamidlal and Harymawan (2021) argue that managerial
ownership is positively related to firm value and support the role of management stock
ownership in aligning the interests of managers and shareholders by making decisions
compatible with the maximization of shareholders’ wealth, therefore maximizing firm value.
Similarly, Yusra et al. (2019) and Ul Huq et al. (2020) have demonstrated a positive effect of
managerial ownership on the firm value of real estate firms and banks respectively and that
the conflicts between company owners and managers can be minimized by urging managers
to act on behalf of the owner to achieve the company’s goal of increasing its value. However,
some other studies suggest a negative relationship between CEO ownership and firm value. Corporate
Khan (2007), Mandaci and Gumuz (2010), Allam (2018) and Syamsudin et al. (2020) have governance
stated that managerial ownership can lead managers to make decisions to pursue their
benefits regardless of their impact on firm value and the welfare of other shareholders.
and firm value
Moreover, Ouyang (2008) found that managerial ownership can reduce the firm value of
Taiwan listed financial institutions due to the managerial entrenchment effect and argue that
when managers have high ownership levels, they tend to abuse their dominant positions,
which in turn affects firm value. Nevertheless, studies by Kumar (2004), Sulong and Nor
(2008), Sugosha and Artini (2020), Sutrisno (2020), and Kusuma and Nuswantara (2021) have
demonstrated that CEO ownership is not associated with firm value. Hence, the following
hypothesis is developed:
H5. CEO ownership has a positive and significant effect on the firm value of European
financial institutions.

3. Research design
3.1 Sample selection and data sources
The research aimed to investigate the effect of board composition and ownership structure on
firm value among a sample of 111 European financial institutions with a total of 1,443
observations between 2007 and 2019. The year 2007 was chosen because from this moment on,
many countries witnessed economic difficulties due to the financial crisis, and their financial
markets were contaminated, which could affect investors’ perceptions severely. However, the
year 2019 was chosen because it is the latest year in conducting this study. Consequently, it
helps capture a better image of the stock market value in the most current period.
Taking into account the varied capital structure from one sector to another, we opted for
financial institutions because this sector plays a vital role in the economic development
process of a country and, therefore, these institutions are increasingly required to provide
more information about their financial structure to promote credibility to investors and
increase shareholders confidence by maximizing their prosperity. We selected European
financial institutions because European countries have not been studied sufficiently in
previous research, and therefore, we intended to fill this gap.
Data on firm value, governance data, and control variables were collected from the
Thomson Reuters Eikon ASSET4 database. However, data on CEO ownership were
manually collected from annual reports of the financial institutions and data on board
diversity were both collected from the Thomson Reuters Eikon ASSET4 database and from
annual reports of the financial institutions.
Table 1 reports the sample selection procedure. Panel A presents the sample distribution
by country, while Panel B presents the sample distribution by sector of activity. More
precisely, our initial sample included all the financial institutions related to the 12 European
countries available on the Thomson Reuters Eikon ASSET4 database during the period
2007–2019. We then eliminated financial institutions with missing data to obtain a final
sample of 111 European financial institutions. Given that the classification of activity sectors
is different in the studied countries, we relied on an international classification of the selected
sectors namely the Industry Classification Benchmark (ICB) which seems to be the most
suitable classification for European companies. We selected five sectors which are banks,
insurances companies, financial services, real estate investments, and investment
instruments. However, due to missing data, we excluded financial institutions related to
the investment instruments sector (Equity and non equity investments instruments) and
worked only on four sectors which are banks, insurances companies, financial services, and
real estate investments.
IJPPM Country Financial institutions %

Panel A. Sample distribution by country

United Kingdom 42 38
Sweden 13 12
France 11 10
Spain 9 8
Greece 7 6
Germany 7 6
Belgium 6 5
Denmark 5 4
Netherlands 3 3
Norway 3 3
Ireland 3 3
Portugal 2 2
Total 111 100
Panel B. Sample distribution by sector activity
Banks 37 33
Life insurance 8 7
Non life insurance 14 13
Financial services 29 26
Table 1.
Distribution of Real estate investments and services 13 12
financial institutions Real estate investment funds 10 9
by country and Total 111 100
industry Note(s): This table presents the sample distribution by country and sector activity

3.2 Variables’ measurement

3.2.1 Dependent variable: firm value. We measured firm value by the market-to-book value
(MTBV). Previous research works have used various measures to evaluate the firm value. For
example, some researchers used Tobin’s Q as the ratio between the firm replacement value
(represented by the sum of the firm market value and total debts) and the firm’s total assets
(Arouri et al., 2014; Enache and Hussainey, 2019; Haj Salem et al., 2020); others use the return
on assets (ROA) and/or the return on equity (ROE) as financial accounting performance
measures (Liew and Devi, 2020).
Nevertheless, the market-to-book ratio is considered an important firm-level predictor for
return in all countries and almost all categories (Cakici and Topyan, 2014). This measure is
also more directed to shareholders’ objectives (Sarkar and Sarkar, 2000). Following prior
research (Bravo, 2017; Abdi et al., 2020), we define the market-to-book value as the market
value of equity divided by its book value. When the ratio is lower than 1, then the market price
is less than the book value and companies tend to be in constant difficulty. Conversely, a ratio
above 1 is associated with high sustained profitability. In other words, a negative difference
between market value and book value is an indicator of potential depreciation, especially if
this difference is maintained over time. However, when the market value is greater than the
book value, it shows the potential ability to generate good profits or increase in value for the
company and its shareholders.
3.2.2 Independent variables. Corporate governance variables are represented in this study
by specific board characteristics including board size, board independence, and board
diversity and specific ownership characteristics including ownership concentration and CEO
ownership. The present work followed prior studies and evaluated board characteristics in
terms of board size (Rahman and Saima, 2018; Nepal and Deb, 2021), board independence
(Vintila and Gherghina, 2013; Khan et al., 2017) and board diversity (Tarigan et al., 2018;
Ararat and Sayedy, 2019). We evaluated ownership characteristics based on ownership Corporate
concentration (Oluwagbemiga et al., 2014; Busta et al., 2014) and CEO ownership (Sugosha governance
and Artini, 2020; Syamsudin et al., 2020). Board size is measured by the natural logarithm of
the number of directors on the board. Board independence is measured by the proportion of
and firm value
independent directors and board diversity by the Blau gender diversity index. We measured
ownership concentration by the percentage of share ownership by the ten major shareholders
and CEO ownership by the percentage of share ownership by the CEO. These different
measurements are summarized in Table 2.
3.2.3 Control variables. We considered other variables that are likely to explain temporal
changes in the value of European financial institutions. Thus, we drew upon prior studies so
that we can identify the most relevant variables that have been associated with changes in
firm value.
The existing literature reports that a financial institution’s size is a key factor in
determining its value (Ahmad and Sallau, 2018; Yusra et al., 2019). The firm size will be very
important for investors and creditors as it would relate to the investment risk. Larger
companies tend to have a higher asset value, which shows that the firm has a good cash
flow, so it has good prospects in the long term (Pratama and Setiawan, 2019). Also, large
firms may have more stable conditions and are better able to generate profits than firms
with small asset value. Thus, a positive association is expected between the financial
institution’s size and firm value. Financial institution size is measured as the natural
logarithm of the total assets.

Variables Acronym Measurement

Dependent variable
Market-to-book MTBV As defined by Thomson Reuters Eikon database, it is a security’s price
value divided by its book value per share actual
Independent variables
Board size LNBDSIZE The natural logarithm of the number of directors on the board
Board independence BDINDEP Percentage of independent directors to
Ptotal number of board members
Board diversity BLAU Blau index which is measured as 1 − ni¼1 p2i where Pi is the percentage
of board members in each category and n is the total number of board
members. Values range from 0 to 0.5, where 0 indicates the lowest
diversity due to the absence of women on the board and 0.5 indicates the
maximum diversity when the number of female and male board
members is the same
Ownership OWNC Percentage of shares owned by the ten largest shareholders to total
concentration number of shares issued
CEO ownership CEOOWN Percentage of shares owned by chief executive officer to total number of
shares issued
Control variables
Financial institution LNSIZE The natural logarithm of the total assets of the financial institution
size
Leverage LVG The ratio of total debt to total assets of the financial institution
Financial institution AGE The natural logarithm of the number of years since the creation of the
age financial institution
Legal system LS Dummy variable which takes 1 for common law countries and Table 2.
0 otherwise Definitions and
Activity sector SECT Dummy variable which takes 1 for banks and 0 otherwise measurements of study
Note(s): This table reports the definitions of all variables used in our study variables
IJPPM A financial institution’s leverage level is another factor that influences its value. From the
agency theory perspective, agency costs are raiser in highly leveraged companies (Jensen
and Meckling, 1976). Consequently, to reduce monitoring costs, companies with a high
leverage ratio are compelled to provide more information to satisfy not only the specific
needs of the shareholders but also those of the long-term creditors (Haj Salem et al., 2020).
Following Yusra et al. (2019), we expect that the financial institution’s leverage will be
positively associated with the firm value. Leverage is measured by the ratio of total debts
divided by total assets.
The financial institution age was also included as a control variable that may affect the
firm value. According to Grullon et al. (2002) and DeAngelo et al. (2006), the firm value could
decrease because firms experience declining profit and a shrinking investment opportunity
set as they age. Pastor and Pietro (2003) affirm that uncertainty creates high valuation of
young firms, but the resolution of uncertainty over time- as investors learn gradually about
the firm’s true profitability- results in a decline in valuation as firms age. Thus, a negative
association is expected between financial institution age and its value. Financial institution
age is measured as the natural logarithm of the number of years since the creation of the
financial institution.
Consistently with prior studies (Rizki and Jasmine, 2018), we controlled for the legal
system. La Porta et al. (2000a, b) revealed that companies operating in common law countries,
where minority shareholders are better protected, pay higher dividends. However, companies
that grow faster pay lower dividends than those that grow slower. This shows that when
shareholders are protected by law, they are likely to wait because there are good investment
opportunities. Therefore, protecting shareholders by law increases the firm value. Thus,
a positive association is expected between legal system and the firm value. The legal
system is measured as a dummy variable which takes 1 for common law countries and
0 otherwise.
Finally, we took into account the activity sector of our sampled financial institutions.
According to Liew and Devi (2020) and Abdi et al. (2020), firm type is a significant variable as
the firm value can be different depending on the type of industry. Thus, we expect that the
activity sector will be positively associated with the firm value. The activity sector is
measured as a dummy variable taking 1 for banks and 0 otherwise.
The measurements of our control variables are summarized in Table 2.

3.3 Model specification

To analyze the impact of board composition and ownership structure variables on firm value,
the following multiple regression model in Equation (1) was developed:
MTBVit ¼ β0 þ β1 LNBDSIZEit þ β2 BDINDEPit þ β3 BLAUit þ β4 OWNCit þ β5 CEOOWNit
þ β6 LNSIZEit þ β7 LVGit þ β8 AGEit þ β9 LSit þ β10 SECTit
X
24 X
37
þ βj YEARit þ βl COUNTRYit þ εit
j¼11 l¼25

(1)
where MTBV is market-to-book value of financial institution i in year t; LNBDSIZEit is board
size; BDINDEPit is board independence; BLAUit is board diversity; OWNCit is ownership
concentration; CEOOWNit is CEO ownership; LNSIZEit is financial institution size; LVGit is
financial institution leverage; AGEit is financial institution age; LSit is financial institution
legal system; SECTit is financial institution sector activity; YEARit and COUNTRYit
represent year and country fixed effects; εit is the random error term; and β0 is the intercept.
Concerning the indices i and t, they correspond to firm and period components of the study. Corporate
Definitions and measurements of all study variables are detailed in Table 2. governance
and firm value
4. Result analysis and discussion
4.1 Descriptive statistics
Table 3 reports the descriptive statistics of the main variables used in this study. The table
provides the mean, standard deviation, and minimum and maximum values for the
dependent, independent, and control variables. The market-to-book value (MTBV) shows a
mean value of 1.592, ranging from
1.85 to 26.37. This result proves that European financial
institutions’ stock is expensive, and the current market value of financial institutions’ assets
is different from records on balance sheets. Moreover, this indicates that the return on stocks
is high and reflects the company’s ability to create value and generate good profits.
Regarding the board variables, board size (BDSIZE) is expressed in actual value in the table.
The board size has a mean value of 12.152, ranging from 2 to 44 directors. Board
independence (BDINDEP) has a mean of 0.435, suggesting that, on average, 43.5% of
directors on the board are independent, varying from 0 to 95.3%. Board diversity (BLAU) has
a mean value of 0.335, ranging between 0 and 0.5, which suggests that we have a rich dataset
that includes financial institutions characterized by a large degree of variation in the gender
diversity of their boards. Regarding ownership structure variables, ownership concentration
(OWNC) has a mean of 0.387, implying that, on average 38.7% of shareholders in the sample
are major shareholders, ranging from 1 to 98.7%. The CEO ownership (CEOOWN) varies
between 0 and 53.5%, with an average of 0.043, implying that, on average 4.3% of shares are
owned by the CEO. For the control variables, the average size of the financial institution
(LNSIZE) is 7.557, the average leverage ratio (LEV) is 28.5%, and the average financial
institution age (AGE) is 1.605. The Legal system (LS) has a mean of 0.445, which suggests
that, on average, 44.5% of countries included in the analysis belong to a common law legal
system. Finally, the activity sector has a mean of 0.345, implying that, on average, 34.5% of
the financial institutions in our study are banks.

4.2 Correlation matrix

To test for the presence of multicollinearity, we calculated the Pearson correlation and the
variance inflation factor (VIF) for all the variables considered in our research. Results from
the correlation matrix and VIF are reported in Table 4. As noted by Pallant (2007), a serious
multicollinearity problem is present if the correlation coefficient among explanatory

Variables Obs Mean SD Min Max

MTBV 1,443 1.592 2.221
1.85 26.37

BDSIZE 1,443 12.152 4.687 2 44
BDINDEP 1,443 0.435 0.246 0 0.953
BLAU 1,443 0.335 0.173 0 0.5
OWNC 1,443 0.387 0.254 0.010 0.987
CEOOWN 1,443 0.043 0.065 0 0.535
LNSIZE 1,443 7.557 1.075 4.811 9.549
LVG 1,443 0.285 0.841 0 20.278
AGE 1,443 1.605 0.403 0.301 2.503
LS 1,443 0.445 0.497 0 1
SECT 1,443 0.345 0.476 0 1 Table 3.
Note(s): This table reports descriptive statistics. Variables definitions are outlined in Table 2 Descriptive statistics
 Table 4.
IJPPM

Correlation matrix
Variables 1 2 3 4 5 6 7 8 9 10 VIF

1. LNBDSIZE 1 1.58
2. BDINDEP
0.095 1 1.33
3. BLAU 0.045 0.275** 1 1.30
4. OWNC 0.141*
0.221**
0.084 1 1.12
5. CEOOWN
0.176*
0.005 0.051
0.122* 1 1.05
6. LNSIZE 0.433** 0.187* 0.393**
0.035
0.024 1 2.30
7. LVG 0.182
0.088
0.123* 0.023
0.035
0.108* 1 1.12
8. AGE
0.139* 0.179* 0.066
0.108*
0.076 0.024 0.021 1 1.23
9. LS
0.230** 0.135*
0.184*
0.037 0.063
0.322**
0.034 0.294** 1 1.32
10. SECT 0.368**
0.072 0.074 0.010 0.049 0.548*** 0.114*
0.155*
0.202** 1 1.69
Note(s): This table presents the correlation matrix between the variables used in the study. Variables definitions are outlined in Table 2. The asterisks ***, ** and *
appearing close to a coefficient indicate the significance levels of 1%, 5 and 10% respectively
variables exceeds a threshold of 0.700. The correlation coefficients show that the Corporate
multicollinearity problem is not a concern in this study, as the highest coefficient among governance
the independent variables is 0.275, between BLAU and BDINDEP. Furthermore, the same
table shows that all VIFs do not exceed the value of 10, which confirms the absence of any
and firm value
multicollinearity problem in this study.

4.3 Panel unit root test

Panel unit root test can be implemented in data analysis to test the stationarity properties of
each of the variables and check whether each series is integrated and contains a unit root. We
implement four panel unit root tests (Levin-Lin-Chu: LLC, Im-Pesaran-Shin: IPS, and Fisher-
types: ADF and PP tests) proposed by Levin et al. (2002), Im et al. (2003), Maddala and Wu
(1999), and Choi (2001), respectively. The null hypothesis of the above unit root tests is that
there exist unit root in the series, i.e. the variables are non-stationary. Rejecting the null
hypothesis means the series is stationary. This series is non-stationary if we cannot reject the
null hypothesis. Table 5 shows the results of the panel unit root tests for each variable by
applying different unit root’s test method. It can be seen that all variables are stationary at the
1% level (for all tests listed p < 0.01), which means no unit root exist in the series. The results
strongly reject the null hypothesis of unit root. Therefore, we can argue that data is stable,
and there is no biased information in the panel.

4.4 Multivariate analysis

4.4.1 Regression analysis. Table 6 provides the regression analysis results associated with
our hypotheses, that test the relationship between corporate governance mechanisms and
firm value. We used multivariate regression analysis on panel data as part of this study to
empirically test these hypotheses. Accordingly, we started by running a specification
panel test following Beck (2001) to decide about the homogeneity or heterogeneity of the
panel data. We found that the Chow test shows an F(55.51) 5 115.111 and a
prob > F 5 0.000. Thus, we should reject the null hypothesis of homogeneity among
individuals. This led us to conclude the sample heterogeneity and then test the existence
or not of individual effects. Therefore, we run a fixed-effects model (within estimate), on
the one hand, and the random effect (estimation with generalized least squares, (GLS)), on
the other. We compared the two methods by the Hausman test to determine the most
suitable model. We found Prob > χ 2 5 0.0011. As this p-value is less than 5%, we retained
the fixed effects model. Moreover, the assumption on homoscedasticity was also verified
in the present study. Indeed, if the heteroscedasticity is not corrected, the estimated
variances and covariances are biased and inconsistent (Kmenta, 1986). The Wald test
performed on the study model, shows a Prob > χ 2 5 0.000. Consequently the null
hypothesis of homoscedasticity is rejected for the model. Hence, the heteroscedasticity
problem was corrected following the Wald test to have unbiased results.
The same table shows that the F-statistic is 46.61 (p 5 0.000). This result demonstrates
that the estimated model is statistically significant. The R2 is equal to 0.3411, implying that
the independent and control variables explain 34.11% of the variability of the firm value.
4.4.2 Discussion of results. The estimated coefficients reported in Table 6 show that board
size does not support the positive and significant association with the firm value. This finding
is consistent with prior studies (Gill and Obradovich, 2013; Thompson et al., 2016; Khan et al.,
2017; Salem et al., 2019), indicating that board size has a negative and significant impact on
firm value. Therefore, H1 is not confirmed. This result does not support the resource
dependency theory and the agency theory in the context of European countries and,
therefore, is inconsistent with the notion that financial institutions with larger boards tend to
have higher market value.
 Table 5.
IJPPM

Panel unit root tests

LLC IPS (W-stat) ADF (Fisher χ 2) PP (Fisher χ 2)
Variable/method No trend Trend No trend Trend No trend Trend No trend Trend

MTBV
14.959*** (0.000)
41.016*** (0.000)
9.790*** (0.000)
10.186*** (0.000) 40.890*** (0.000) 26.464*** (0.000) 43.592*** (0.000) 28.283*** (0.000)
LNBDSIZE
11.854*** (0.000)
17.270*** (0.000)
5.482** (0.013)
6.593*** (0.000) 10.986*** (0.000) 5.393*** (0.000) 12.365*** (0.000) 6.687*** (0.000)
BDINDEP
29.753*** (0.000)
39.094*** (0.000)
7.798*** (0.000)
8.343*** (0.000) 27.218*** (0.000) 19.892*** (0.000) 30.966*** (0.000) 18.743*** (0.000)
BLAU
10.259*** (0.000)
13.929*** (0.000)
4.103*** (0.001)
8.594*** (0.000) 12.813*** (0.000) 8.636*** (0.000) 13.579*** (0.000) 9.211*** (0.000)
OWNC
36.328*** (0.000)
48.597*** (0.000)
7.932** (0.024)
9.928*** (0.000) 12.535*** (0.000) 10.535*** (0.000) 14.322*** (0.000) 13.053*** (0.000)
CEOOWN
10.995*** (0.000)
13.459*** (0.000)
1.909 (0.228)
6.124*** (0.000) 10.268*** (0.000) 13.229*** (0.000) 10.677*** (0.000) 13.548*** (0.000)
LNSIZE
3.668*** (0.000)
28.681*** (0.000) 6.413 (0.960)
7.178*** (0.000) 5.649*** (0.000) 33.378*** (0.0000) 8.241*** (0.000) 37.927*** (0.000)
LVG
17.706*** (0.000)
19.244*** (0.000)
2.989*** (0.000)
6.627*** (0.000) 16.651*** (0.000) 20.586*** (0.000) 16.945*** (0.000) 20.948*** (0.000)
AGE
61.035*** (0.000)
50.639*** (0.000)
24.574** (0.003)
26.708*** (0.000) 365.986*** (0.000) 354.406*** (0.000) 376.299*** (0.000) 365.167*** (0.000)
LS
32.861*** (0.001) 36.143*** (0.000)
10.168 (0.990)
9.952 (0.975) 2.162 (0.767) 14.679*** (0.000)
SECT
42.911*** (0.000)
76.272*** (0.000)
10.300 (0.998)
10.070 (0.988)
2.360 (0.859) 17.531*** (0.000)
Note(s): The statistics in the first row represent the estimated coefficients of the variables while the second row in parentheses represents their respective p-values. ***, **, and * indicate
statistical significance at the level of 1%, 5 and 10% respectively
Variables Coefficient t-statistic Probability
Corporate
governance
Intercept 7.726*** 11.88 0.000 and firm value
LNBDSIZE
1.659***
3.58 0.000
BDINDEP
0.421
1.51 0.131
BLAU 0.384** 1.98 0.048
OWNC
0.683***
2.82 0.000
CEOOWN 2.491*** 2.55 0.001
LNSIZE 0.658*** 7.56 0.000
LVG 0.260 0.95 0.320
AGE
0.253***
3.53 0.000
LS 0.385*** 2.78 0.001
SECT
0.026
0.16 0.871
Year fixed effect Included
Country fixed effect Included
Number of observations 1,443
R2 0.3411
2
R adjusted 0.3143
F-statistic 46.61
Probability (F-statistic) (0.000)
Homogeneity test F-statistic 115.111
(p-value) (0.000)
Hausman test χ (p-value)
2
31.82 (0.0011)
Heteroscedasticity test χ 2 192.66
(p-value) (0.000)
Note(s): This table presents the results of regression estimation that includes fixed effects for fiscal year and
country. Year and country indicators are included in our models, but their coefficients are not shown in this
Table. Variables definitions are outlined in Table 2. *** and ** indicate statistical significance at the level of 1 Table 6.
and 5% respectively Regression results

Board independence has a negative and non-significant impact on firm value. This finding is
consistent with other studies (Hermalin and Weisbach, 2003; Kumar and Singh, 2012;
Mukhtaruddin et al., 2014; Asante-Darko et al., 2018) and supports the idea that a higher
proportion of outside directors does not lead to better firm value. Thus, H2 is not supported.
This finding demonstrates that the simple presence of independent directors to meet the
formal requirements of corporate governance models does not improve efficiency and firm
value in European countries. Consequently, this result does not support the resource
dependency theory and the agency theory because it is inconsistent with the view that
financial institutions with a high proportion of outside directors tend to have better
firm value.
Board diversity is positively and significantly associated with the firm value at the 5%
significance level (β 5 0.348, p < 0.05). This finding supports H3 and implies that European
financial institutions with female representation in the board of directors have a high in firm
value. This result also suggests that a mixture of men and women is important to forming a
stronger board that boosts the financial institution’s performance. This may be due to greater
gender diversity offering a broader perspective in terms of decision making, as the directors
come from different demographic backgrounds. This is supported by earlier studies which
indicate that higher female representation contributes to a higher quality decisions, to
increases in creativity and innovation (Ramly et al., 2015; Terjesen et al., 2016; Salem et al.,
2019; Issa et al., 2019; Khanh et al., 2020; Noguera, 2020). In addition, the differences of the
women’s demographic background as compared to men offers variety in terms of personality,
communication style, educational background, career experience, and expertise (Liao et al.,
2015), which contribute to a wider perspective in decision making and strategic planning.
IJPPM This contributes positively to the firms’ value and hence increases their competitive
advantage. According to the resource dependency theory, women facilitate access to valuable
resources that are principal to a company’s success, which can enhance the firm’s value and
financial performance.
As can be seen from Table 6, ownership concentration is negatively and significantly
associated with the firm value at the 1% significance level (β 5
0.683, p < 0.01). This result
implies that European financial institutions with a high ownership concentration have a low
firm value. It also denotes that large investors can expropriate minority shareholders’ wealth,
which can lead to agency problems due to the major shareholders’ capacity to satisfy their
interests at the cost of small investors, and therefore firm value will decrease. This finding is
inconsistent with the predictions of our fourth hypothesis. Thus, H4 is rejected. This last
finding is in line with those of Vintila and Gherghina (2014), Busta et al. (2014), and Kiharo and
Kariuki (2018).
CEO ownership is positively related to the firm value at the 1% significance level
(β 5 2.491, p < 0.01). This finding supports H5 and indicates that European financial
institutions with higher CEO ownership have a high firm value. This finding also implies
that more managerial ownership can reduce agency problems due to the complete
alignment between the interests of the manager and shareholders. As equity owners,
managers have incentives to monitor companies carefully to ensure a higher return on
their ownership. Therefore, they will make decisions compatible with the maximization of
the welfare of other shareholders, and provide a high value for the company. This result
corroborates some previous studies (Rizqia et al., 2013; Yusra et al., 2019; Ul Huq
et al., 2020).
For the control variables, we found that the financial institution size is positively related to
the firm value at the 1% significance level (β 5 0.658, p < 0.01). This finding is consistent with
earlier studies (Tui et al., 2017; Ahmad and Sallau, 2018; Yusra et al., 2019) and indicates that
the large size of the financial institution increases the firm value. In other words, the bigger
the size of the financial institution, the higher the credibility of the financial institution’s
ability to provide return on investment to investors.
Moreover, we document a positive and non-significant relationship between financial
institution’s leverage and firm value. Contrary to our expectation, highly leveraged financial
institutions do not affect the firm value significantly. This result is consistent with the
findings of Mintah and Schadiwitz (2019) and Endri and Fathony (2020) that the increase or
decrease in the leverage value is not always behind the high or low value of the company,
because investors see investment risk from various sides of the financial statements, and do
not refer to the company leverage only. A leverage value is considered acceptable if the
company does not use a significant amount of debt as capital to run its business, but in reality,
no one can determine its acceptable value.
The financial institution’s age is negatively and significantly related to the firm value at
the 1% significance level (β 5
0.253, p < 0.01). This result indicates that older financial
institutions tend to have a low firm value. This finding is in consistent with that of Grullon
et al. (2002) and DeAngelo et al. (2006). According to Chay et al. (2015), older companies
experience lower investment opportunities and lower profits, which could reduce their
market value.
Furthermore, our findings indicate that the financial institution’s legal system is
positively and significantly related to the firm value at the 1% significance level (β 5 0.385,
p < 0.01). This result implies that European financial institutions operating in a country with
an appropriate legal system tend to have a high firm value. This finding is consistent with
that of La Porta et al. (2000a, b) who indicated that investors pay more attention to
information about protecting their rights as investors by the state and that protecting
shareholders by law increases the firm value.
 Finally, we find a negative and non-significant relationship between financial institution’s Corporate
activity sector and firm value. Contrary to our expectation, the activity sector does not affect governance
the firm value significantly. This finding confirms that of Abdi et al. (2020) who find that
dividing activity sectors is unnecessary because its effect is insignificant on firm value.
and firm value

4.5 Robustness checks

We conducted additional analyzes to verify whether the suggested effect of corporate
governance on firm value would be rigorously maintained. Our additional analyzes relate to:
(1) The legal origin of the country where financial institutions are domiciled
(2) Dynamic effect
4.5.1 Effect of legal system at the country level. Given that the European countries used in this
study do not have the same legal system, the behavior of financial institutions will be affected
in terms of corporate governance practices and value creation. We chose 12 European
countries having different traditions and cultures and belonging to common law and civil law
legal systems. The United Kingdom and Ireland, as Anglo-Saxon countries, have a common
law accounting system, which includes the accounting standards used to prepare financial
information. However, France, Spain, Greece, Belgium, Germany, Denmark, Sweden,
Netherlands, Norway, and Portugal have a civil law accounting system. For this reason,
we considered administering a robustness test to validate our results. To this end, we divided
our study sample into two sub-samples. The first sub-sample consisted of financial
institutions belonging to the common law system (i.e. 45 corresponding to 585 observations),
while the second enclosed financial institutions related to the civil law system (i.e. 66
corresponding to 858 observations).
We also reiterated our analysis regarding the five advanced hypotheses, following the
splitting of our sample into financial institutions according to the legal system they belong to.
These tests achieved results are displayed in Table 7.
On subdividing the sample of financial institutions, the results seem to be similar for
the hypotheses H1, H2, H3 and H4. In this way, the obtained results tend, in their entirety,
to validate the reached findings of the first model, i.e. the corporate governance
mechanism relating to board gender diversity prove to have a positive and significant
effect on improving the financial institution’s market value of both sub samples.
Concerning board size and ownership concentration, they prove to have a negative and
significant effect on the financial institution value in both sub samples, while board
independence is found to have a non- significant effect. However, the attained results
appear to be different from those presented for hypothesis H5. It is only for the sub-sample
of financial institutions belonging to the common law system that the coefficient of
CEOOWN is positive and statistically significant at the 1% level (β 5 3.627, p < 0.01). This
finding proves the importance of the CEO ownership role in the financial institutions
belonging to the common law system. In other words, the common law system is
characterized by a governance structure oriented towards the protection of shareholders,
which is why a high level of managerial ownership will lead managers to make decisions
in accordance with the maximization of shareholders’ wealth, which will reduce agency
costs and improve the financial institution’ market value.
4.5.2 Dynamic effect. A major econometric concern highlighted nowadays is that past and
current firm value determines corporate governance. In other words, the identification of the
consequences of the implementation of a corporate governance requires taking into account
the dynamic effect of corporate value. Thus, it is asserted that the firm value at period t
depends necessarily on the information about the firm value at period t
1. To this end, we
carried out a multi-step analysis to verify the importance of taking into account the dynamic
IJPPM Model (1): Common law system Model (2): Civil law system
Variables Coefficient t-statistic Probability Coefficient t-statistic Probability

Intercept 13.189*** 10.46 0.000 3.178*** 7.11 0.000

LNBDSIZE
5.984***
4.44 0.000
0.528**
2.11 0.035
BDINDEP
0.864
1.13 0.257
0.381
1.92 0.107
BLAU 0.616** 2.64 0.017 0.470** 2.30 0.021
OWNC
1.819***
3.20 0.001
0.096*
2.12 0.010
CEOOWN 3.627*** 2.76 0.010 0.142 0.13 0.927
LNSIZE 0.430** 2.21 0.028 0.173*** 3.33 0.001
LVG
2.379
1.56 0.059 0.075
1.85 0.069
AGE
0.686**
2.06 0.042
0.159*
1.99 0.062
SECT
0.181
0.44 0.667
0.269
1.05 0.028
Year fixed effect Included Included
Country fixed effect Included Included
Observations 585 858
R2 0.243 0.179
R2 adjusted 0.225 0.157
F-statistic 34.79 24.81
Probability (F-statistic) (0.000) (0.000)
Table 7. Note(s): This Table reports results of an additional test to extend our research. Year and country indicators
Robustness check are included in the model, but their coefficients are not shown in this Table. Measurements are summarized in
results on legal country Table 2. The asterisks ***, ** and * appearing close to a coefficient indicate the significance levels of 1%, 5 and
origin 10% respectively

behavior of companies to understand the relationship between the firm value in the two
successive years.
Therefore, to effectively test the robustness of the results obtained by our model, it is
recommended to revise our initial model by testing the continuity effect of the exercises on
corporate value. In other words, we tested the effect of the firm value at period t
1 on the firm
value of at period t. We have to observe financial institutions over at least two consecutive
years. For these reasons, we chose the Generalized Moment Method System (GMM-SYS) in
two stages proposed by Blundell and Bond (1998). This method is designed for the dynamic
study of samples characterized by time series. We applied Arellano and Bond’s (1991)
technique as the current estimator to allow us to improve the results while taking into
consideration the time-series dimension of data. Specifically, the GMM estimator permits
controlling endogeneity between variables and unobservable heterogeneity, which varies
depending on each company but is invariant over time.
Thus, the estimated panel data dynamic model consists of establishing a relationship
between firm value of the financial institutions at period t, denoted Y, and the one year lagged
value of firm value (Lag MTBV), the board characteristics and the ownership structure and
the set of control variables (X) according to the following equation:
Yit ¼ β1 Yi;t−1 þ β2 LNBDSIZEit þ β3 BDINDEPit þ β4 BLAUit þ β5 OWNCit þ β6 CEOOWNit
þ β7 Xit þ ut þ it
(2)

Table 8 presents the results found following the introduction of the delayed effect in our
research model.
Indeed, it is necessary to consider the validity of the instruments, which must be assessed
from two angles. Firstly, the instruments used must not be correlated with the error terms
Variables Coefficient t-statistic Probability
Corporate
governance
Intercept 5.534*** 3.43 0.003 and firm value
LagMTBV 0.346*** 4.71 0.000
LNBDSIZE
1.064**
2.20 0.028
BDINDEP
0.466
1.89 0.059
BLAU 0.440** 2.38 0.017
OWNC
0.663***
3.22 0.001
CEOOWN 3.188** 2.03 0.043
LNSIZE 0.624*** 3.03 0.002
LVG 0.009 0.28 0.781
AGE
0.727**
2.29 0.022
LS 0.880** 2.82 0.017
SECT
0.021
0.05 0.962
Year fixed effect Included
Country fixed effect Included
Number of observations 1,443
2
R 0.2762
F-statistic 40.84
Probability (F-statistic) (0.000)
Arellano bond AR (1)
2.690
(z, p-value) (0.000)
Arellano bond AR (2)
1.548
(z, p-value) (0.311)
Sargan test 252.79
(χ , p-value)
2
(0.000)
Table 8.
Hansen test 35.91 Robustness check
(χ 2, p-value) (0.254) results on dynamic
Note(s): The table presents results of the GMM system regressions of firm value. Lag MTBV is the 1-year estimation of
lagged value of the firm value. Variables definitions are outlined in Table 2 panel data

(first and second-order autocorrelation tests: AR1 and AR2, respectively). Then, the condition
of exogeneity of the instruments (delayed variables) can be checked by means of the Hansen
test. Estimates were conducted using the Stata 13 software from the Xtabond2 command
developed by Roodman (2009).
In this study, we note that the various tests specified above are conclusive for all the
selected specifications. Moreover, Hansen’s over-identification test does not reject the null
hypothesis of the validity of the lagged and differential variables as instruments. Besides,
AR1 and AR2 tests validate the non-reject of the null hypothesis of the autocorrelation of
first-order residues and lack of second-order autocorrelation of errors, respectively. It is
then possible to conclude that the residuals are not correlated and that the condition on
the moments is correctly specified. Finally, the level of significance and the value of the
coefficients of the delayed variable of firm value (Lag MTBV) provide a new justification
for the dynamic specification of the model and confirm the need to include these effects.
Indeed, firm value depends strongly on their retarded variables and corporate governance
practices.
Taking into account the dynamics allows both to consolidate and clarify the results
obtained previously. The results presented in Table 8 highlight the presence of dependence or
temporal dynamics. Thus, the firm value at period t
1 is positively and significantly
correlated with that in (t) at the 1% significance level (β 5 0.346, p < 0.01). They also confirm
the previous results taking into account the retarded effects and the dynamics of corporate
governance practices. It should also be noted that the implementation of corporate
IJPPM governance practices is strongly and positively correlated with the firm value at period t.
Finally, the firm value is driven by a dynamic that is not exhausted at the end of each fiscal
year. Thus, we speak of the existence of a synergy of complementarities, in accordance with
our research hypotheses, given the dynamic temporal nature between firm value and the
corporate governance mechanisms.

5. Conclusion
This study aimed to investigate the impact of particular corporate governance mechanisms
on the firm value of European financial institutions. The financial sector was selected as there
are very few studies examining the firm value in Europe that provide limited empirical
evidence on the effects of the possible underlying factors on the fluctuations of firm value in
the financial institutions. The results show an improvement in the firm value between 2007
and 2019. The empirical findings indicate that board gender diversity and CEO ownership
have a positive impact on the firm value while board size and ownership concentration have a
negative impact on the firm value. Nevertheless, board independence does not influence the
firm value. Concerning the control variables, the results show that financial institution size,
age and legal system are significant factors in influencing changes in firm value in the context
of Europe.
This study has several potential implications for investors, financial institutions and
regulators. First, our findings are useful for investors who want to invest in the financial
sector, as they should pay attention to financial institutions that have more
shareholdings held by the CEO, as these companies are expected to reach better firm
value. Investors should also look for younger financial companies with smaller and
diversified boards. Relatively large financial institutions may also be chosen by
investors for a better return. The results of the study prove that these factors have a
significant influence on the fluctuations in the value of financial institutions, which will
ultimately have an impact on the company’s stock price. Second, the findings of our
study suggest that the financial institutions should pay more attention to corporate
governance mechanisms as effective board and ownership structure may be important
mechanisms for the financial sector companies. Board characteristics, such as board
gender diversity, as well as ownership structure, such as CEO ownership, could enhance
the firm value. Third, our findings are important to policymakers in European countries.
These findings indicate that the representation of female directors on boards and the
CEO ownership should be encouraged in European financial institutions. The
government and the regulatory bodies should propose regulations that enforce gender
diversifying in the board of financial institutions and increase the CEO share ownership
to enhance the financial performance of the financial institutions in Europe. This may
help the financial institutions to ensure their long term survival as well as to reduce the
risk of financial distress, or bankruptcies in the future.
The present study acknowledges several limitations, which highlight new avenues for
further research. First, the study explores the firm’s value analysis of financial sector
companies in Europe. As other non-financial business organizations play a central role in any
economy, future research examining the firm value across other industries and sectors such
as chemistry, textile, energy, mining, information technology, and telecommunications,
would provide new insights into the firm’s value analysis in European countries. Second, this
study focuses only on the effects of some specific governance mechanisms, including board
size, board independence, board gender diversity, ownership concentration, and CEO
ownership. Therefore, future research could investigate other internal and external
dimensions of corporate governance to understand corporate governance’s role in
improving corporate value.
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About the authors Corporate
Hanen Ben Fatma is a Ph.D. Student in Accounting, Faculty of Economic Sciences and Management of
Sfax, University of Sfax, Sfax, Tunisia. Her main research interests are related to real earnings governance
management and disclosure. Hanen Ben Fatma is the corresponding author and can be contacted at: and firm value
[email protected]
Jamel Chouaibi holds a Ph.D. degree from the University of Sfax in Tunisia. He is now associate
professor of Accounting at the Faculty of Economic Sciences and Management of Sfax (Tunisia) and a
Researcher at laboratory of research in information technology, governance and entrepreneurship
“LARTIGE”. His research works focus on financial and accounting information, corporate governance,
standards and accounting principles and corporate social responsibility. He has published several
papers in various refereed journals such as International Journal of Law and Management, Journal of the
Knowledge Economy, Journal of Economics Finance and Administrative Science, International Journal
of Managerial and Financial Accounting, Accounting and Management Information Systems, EuroMed
Journal of Business.

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