Understanding the endogeneity between firm value and shareholder rights

I explore the relation between firm value and the shareholder rights-based Governance Index "G" which has become a popular measure of governance quality among researchers and investors. I show that the relation is not spuriously driven by unobservable firm heterogeneity or an assortment of observable firm characteristics, such as firm growth potential and profitability. The causality seems to run from G to firm value, rather than from firm value to G My results suggest that granting more rights to shareholders could be an effective way to reduce agency costs and enhance firm value.