Thursday, March 4, 2021
Although empirical scholarship dominates the field of law and finance, much of it shares a common vulnerability: an abiding faith in the accuracy and integrity of a small, specialized collection of corporate governance data. In this paper, we unveil a novel collection of three decades’ worth of corporate charters for thousands of public companies, which shows that this faith is misplaced.
We make three principal contributions to the literature. First, we label our corpus for a variety of firm- and state-level governance features. Doing so reveals significant infirmities within the most well-known corporate governance datasets, including an error rate exceeding eighty percent in the G-Index, the most widely used proxy for “good governance” in law and finance. Correcting these errors substantially weakens one of the most well-known results in law and finance, which associates good governance with higher investment returns. Second, we make our corpus freely available to others, in hope of providing a long-overdue resource for traditional scholars as well as those exploring new frontiers in corporate governance, ranging from machine learning to stakeholder governance to the effects of common ownership. Third, and more broadly, our analysis exposes twin cautionary tales about the critical role of lawyers in empirical research, and the dubious practice of throttling public access to public records.
The authors recognized a major problem underlying much of the past empirical research, namely that "several of the most heavily relied-upon governance datasets suffer from inaccuracies so extensive so as to call into question some of the landmark insights of the field." After putting in an enormous amount of work to get a more reliable dataset, they show that some of the most significant findings in the field, now need to be re-evaluated. They're also releasing the dataset so that others can work with it. They also explain that part of the reason why inaccuracies and poor datasets have lingered for so long is that notable jurisdictions (ahem Delaware) "actively throttle public access" to documents.
In the coming months and years, I expect that the dataset will be used to reevaluate much of what we now think we know about corporate governance. By making their data open -source, any errors inadvertently made in the collection appear unlikely to persist as others work with the data.
The authors explain that they are "deeply indebted to" an extensive team of assistants for their work. The Senior Research Assistants (JD students or recent grads) were: Nicole Banton, Matthew Cunningham, Deandra Fike, Channing Gatewood, Katie Gresham, Qifan Huang, Elisha Jones, Sami Kattan, Gabrielle Kiefer, Andrew Kim, Adam Mazin, Cameron Molis, Courtney Murray, Doriane Nguenang, Sneha Pandya, Emily Park, Olivia Roat, Bhargav Setlur, Tom St. Henry, Avi Weiss, Gretchen Winkel, Geoffrey Xiao, and Ben Zonenshayn. Research Assistants (undergraduate students) were: Nathaniel Barrett, Amanda Cooper, Elif Nazli Hamutcu, Alex Inskeep, Justen Joffe, Alexa Levy, Annabelle Liu, Noam Miller, Emily Moini,Stephen Rothman, Adrien Stein, Max Swan, and Agnes Tran.