Internal governance and performance: Evidence from when external discipline is weak

- External discipline confounds estimating the effect of governance on performance.
- Firms in the nonprofit economic environment have muted external discipline.
- Nonprofit hospitals provide a uniform sample to examine the effect of governance.
- Spillovers from geographically local public firms are used for identification.
- Stronger governance results in a lower probability of death in heart attack patients.

The effect of internal governance on performance is potentially economically significant but may be difficult to identify because of confounding external disciplinary mechanisms and the endogenous choice of internal governance. This study addresses those difficulties by using nonprofit hospitals as an economic environment with muted external disciplinary mechanisms and instrumenting for internal governance using governance spillovers of geographically local public firms. Using patient heart attack survival as a measure of performance, a one standard deviation increase in strength of internal governance reduces the probability of death by 0.89 percentage points after controlling for patient characteristics.