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A reliability model for assessing corporate governance using machine learning techniques

Hernandez-Perdomo, Elvis; Guney, Yilmaz; Rocco, Claudio M.

Authors

Elvis Hernandez-Perdomo

Claudio M. Rocco

Abstract

Corporate governance assesses the efficiency and effectiveness of companies’ operations and decisions to ensure value creation for shareholders and optimal risk taking. As investors’ decision making process largely depends on financial information and corporate reports, transparency is capital for the stability of a company, or even the stability of a country via the corporate sector. This research introduces the system reliability theory to properly model the behavior of companies regarding their corporate governance mechanisms. We propose the assessment of the corporate governance framework by mapping its inputs as components (either in operating or failed state) along with firm characteristics to determine an approximate Structure Function that enables alternatively modeling the functioning of the system, quantifying its reliability and detecting critical components. The advantage of the proposed mapping approach is illustrated using a sample of 1,109 U.S. listed companies during the period 2002-2014, reporting financial and non-financial information as components of the corporate governance system and the return on assets as the system output. The proposed approach is also useful for modeling other non-engineering sub-systems; companies, financial markets or even economies would be exposed to significant risk if these systems do not function properly.

Journal Article Type Article
Publication Date 2019-05
Journal Reliability Engineering & System Safety
Print ISSN 0951-8320
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 185
Pages 220-231
Institution Citation Hernandez-Perdomo, E., Guney, Y., & Rocco, C. M. (2019). A reliability model for assessing corporate governance using machine learning techniques. Reliability Engineering and System Safety, 185, 220-231. doi:10.1016/j.ress.2018.12.027
DOI https://doi.org/10.1016/j.ress.2018.12.027
Keywords Industrial and Manufacturing Engineering; Safety, Risk, Reliability and Quality
Publisher URL https://www.sciencedirect.com/science/article/pii/S0951832017308554
Additional Information This article is maintained by: Elsevier; Article Title: A reliability model for assessing corporate governance using machine learning techniques; Journal Title: Reliability Engineering & System Safety; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.ress.2018.12.027; Content Type: article; Copyright: © 2018 Elsevier Ltd. All rights reserved.