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Corporate Governance Ratings and Firm Performance

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  • Mine Ertugrul
  • Shantaram Hegde

Abstract

We examine the corporate governance ratings provided by three premier US rating agencies and find that summary scores are generally poor predictors of primary and secondary measures of future firm performance. However, some component sub‐ratings that focus on the eight key dimensions of dynamic governance structures provide more positive and reliable evidence of their information content in predicting the multiple dimensions of firm performance. These results reflect the recent observations by academic researchers and money managers that it is extremely difficult to distill all of the complex governance mechanisms into a single integrated, yet informative overall score.

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  • Mine Ertugrul & Shantaram Hegde, 2009. "Corporate Governance Ratings and Firm Performance," Financial Management, Financial Management Association International, vol. 38(1), pages 139-160, March.
    • Handle: RePEc:bla:finmgt:v:38:y:2009:i:1:p:139-160
    DOI: 10.1111/j.1755-053X.2009.01031.x
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    2. Akshita Arora & Shernaz Bodhanwala, 2018. "Relationship between Corporate Governance Index and Firm Performance: Indian Evidence," Global Business Review, International Management Institute, vol. 19(3), pages 675-689, June.
    3. Hernandez-Perdomo, Elvis & Guney, Yilmaz & Rocco, Claudio M., 2019. "A reliability model for assessing corporate governance using machine learning techniques," Reliability Engineering and System Safety, Elsevier, vol. 185(C), pages 220-231.
    4. Cellier, Alexis & Chollet, Pierre, 2016. "The effects of social ratings on firm value," Research in International Business and Finance, Elsevier, vol. 36(C), pages 656-683.
    5. Jackie Krafft & Yiping Qu & Jacques-Laurent Ravix, 2011. "Gouvernance d'entreprise et performances sectorielles : une réévaluation de la fiabilité des scores et des mesures de bonne gouvernance," Economie & Prévision, La Documentation Française, vol. 0(1), pages 145-158.
    6. Nico Lehmann, 2019. "Do Corporate Governance Analysts Matter? Evidence from the Expansion of Governance Analyst Coverage," Journal of Accounting Research, Wiley Blackwell, vol. 57(3), pages 721-761, June.
    7. Ammann, Manuel & Oesch, David & Schmid, Markus M., 2011. "Corporate governance and firm value: International evidence," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 36-55, January.
    8. Iqbal, Jamshed & Strobl, Sascha & Vähämaa, Sami, 2015. "Corporate governance and the systemic risk of financial institutions," Journal of Economics and Business, Elsevier, vol. 82(C), pages 42-61.
    9. Manuel Ammann & David Oesch & Markus Schmid, 2013. "The construction and valuation effect of corporate governance indices," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 13, pages 314-340, Edward Elgar Publishing.
    10. Alexis Cellier & Pierre Chollet, 2012. "Corporate Social Responsibility Rating Information: Relevance and Impacts on Financial Markets," Palgrave Macmillan Books, in: Sabri Boubaker & Duc Khuong Nguyen (ed.), Board Directors and Corporate Social Responsibility, chapter 10, pages 179-201, Palgrave Macmillan.
    11. Ammari, Aymen & Bouteska, Ahmed & Regaieg, Boutheina, 2016. "CEO Entrenchment and Performance: New Evidence Using Nonlinear Principal Component Analysis," MPRA Paper 75529, University Library of Munich, Germany.
    12. Sun, Fangcheng & Dutta, Shantanu & Huang, Hui & Zhu, Pengcheng, 2021. "News media and insider trading profitability: An emerging country perspective," Emerging Markets Review, Elsevier, vol. 49(C).
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    15. Burak Pirgaip & Mehmet Berktay Akyüz, 2020. "To Be Rated or To Be Indexed: Corporate Governance Rating Experience in Borsa Istanbul," Istanbul Business Research, Istanbul University Business School, vol. 49(2), pages 271-300, November.
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    17. James S. Ang & Wei Mike Chen & Shan Li & Lihong Wang, 2022. "Gaming governance: cosmetic or real corporate governance changes?," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 91-121, July.
    18. Shih-Yao Lin & Ai-Chi Hsui, 2017. "Correlation between Office Locations, Corporate Governance and Business Performance," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 668-676.
    19. Naif AlSagr & Samir Belkhaoui & Abdullah Aldosari, 2018. "The Effect of Corporate Governance Mechanisms on Bank Performance Evidence from Saudi Banking Sector," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(8), pages 1111-1125, August.
    20. Ali, Searat & Hussain, Nazim & Iqbal, Jamshed, 2021. "Corporate governance and the insolvency risk of financial institutions," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    21. Huang, Peng & Lu, Yue & Wee, Marvin, 2020. "Corporate governance analysts and firm value: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).

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