Efficient Governance Structures, Corporate Investment, and Profitability

Using a panel data set of 361 German corporations for the period 1991-1996 we test the hypothesis that firms with more efficient governance structures have higher profitabilities. To determine efficiency we compare firms with respect to ownership concentration, the identity of owners, capital structure, investment and firm growth by a multi-input/multi-output Data Envelopment Analysis (DEA). The DEA efficiency scores are then used as exlanatory variables in panel data regressions of profitabiltiy. Our main finding is that the efficiency scores indeed contribute significantly to explaning profitability differences between firms, even after controlling for industry effects and unobserved systematic firm effects.