What are your parameters to measure corporate governance?

With considering these parameters we can build corporate governance index.

A few issues come to mind there Mohamed:

*  For corporate governance parameters it might be worth using Cadbury (1992) or Hampel (1998), such as board effectiveness, audit committee independence, internal audit effectiveness, external audit turnover etc.

*  Rather than book value, would market capitalisation be a more useful measure as this would incorporate the market's perception of firm value?

*  On the other hand, both book value and market capitalisation could be vulnerable to corporate governance error.  Queens Moat Houses and the recent Tesco case come to mind where poor corporate governance actually resulted in the erroneous inflation of book value (and market cap) until the errors were discovered, which resulted in significant downward adjustments. 

When answering this question one has to identify the the of statistics to be used in measuring corporate governance.  However, there could be positive relationship between the market capitalization and corporate governance if a strict corporate governance policy is adhered to.

Paul, Not sure why you say "book value does not include intangible assets, such as good will, i.e. corporate governance. This is called tangible book value."  Book value does include intangible assets to the extent that they are included in the 'books', typically under Fixed Assets.  Corporate governance is a quite separate concept, correctly identified under your second paragraph as a system of approaches designed to mitigate agency risk. 

thanks for all of you, 

I agree with the analysis of Paul Louangrath. Corporate Governance, in my opinion, is a very important intangible asset. If we look at the board of directors it is a source of human capital and relational capital.

For Index construction read this articles and its appendix 

Article Corporate Governance and Firm Performance: The Role of Trans...

THANM YOU MR RASHID I FOUND IT SO USEFUL. BEST REGARDS

Mohamed, different researchers will find different things. Some will find significant differences and others will not and this will depend on the quality of the data, methodology and the level of accuracy. The hypothesis is that corporate governance should be good for the firm so the relationship should be significant at the same time there should be corporate governance in letter and the spirit. It is unlikely bad corporate governance can improve book values.Your 2nd question on replacing Tobins q with book values reflect accounting conservatism.If the assets of the firm has appreciated because of good leadership, why should you revert to book values?. Unless there is something wrong with the market values, they should be ok especially if you are using IFRS. There are some jurisdictions like the US or  China where market values are not allowed but otherwise Tobins q should just be fine.

Dear  Mohamed,

I think it depends on what you mean by "book value" and which GAAP you are looking at. Book values (from historical cost accounting, fair value accounting or a mix of the both) can be flawed. But this cannot be drectly traced back to certain corporate governance arrangements. With the benefit of hindsight, we can often state that the entities engaged in financial statement misrepresentations have had poor corporate governance. On the other hand, even companies with strong corporate governance can have books with flawed values if allowed acc. to the local GAAP. For example, under historical cost accounting book values may be significantly undervalued and entail hidden reserves, if compared to fair values, but nevertheless be acceptable under the prevailing GAAP.

Paul