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Rating the ratings: How good are commercial governance ratings?

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  • Daines, Robert M.
  • Gow, Ian D.
  • Larcker, David F.
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    Abstract

    Proxy advisory and corporate governance rating firms (such as RiskMetrics/Institutional Shareholder Services, GovernanceMetrics International, and The Corporate Library) play an increasingly important role in U.S. public markets. They rank the quality of firm corporate governance, advise shareholders how to vote, and sometimes press for governance changes. We examine whether commercially available corporate governance rankings provide useful information for shareholders. Our results suggest that they do not. Commercial ratings do not predict governance-related outcomes with the precision or strength necessary to support the bold claims made by most of these firms. Moreover, we find little or no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.

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    File URL: http://www.sciencedirect.com/science/article/B6VBX-50CDST5-1/2/b48eff770c8dbaa479d6cdedec0ac4eb
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 98 (2010)
    Issue (Month): 3 (December)
    Pages: 439-461

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    Handle: RePEc:eee:jfinec:v:98:y:2010:i:3:p:439-461

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Corporate governance Governance ratings;

    References

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    Cited by:
    1. Alexander B. Matthies, 2013. "Empirical Research on Corporate Credit-Ratings: A Literature Review," SFB 649 Discussion Papers SFB649DP2013-003, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Kim, Irene & Skinner, Douglas J., 2012. "Measuring securities litigation risk," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 290-310.
    3. Oskar Kowalewski, 2012. "Corporate Governance and Pension Fund Performance," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(1), March.
    4. Matos, Pedro Verga & Faustino, Horácio C., 2012. "Beta-convergence and sigma-convergence in corporate governance in Europe," Economic Modelling, Elsevier, vol. 29(6), pages 2198-2204.
    5. Al-Malkawi, Husam-Aldin N. & Pillai, Rekha & Bhatti, M.I., 2014. "Corporate governance practices in emerging markets: The case of GCC countries," Economic Modelling, Elsevier, vol. 38(C), pages 133-141.
    6. Roberto E. Wessels & Tom J. Wansbeek, 2014. "What is the Relation (if any) Between a Firm's Corporate Governance Arrangements and its Financial Performance?," CESifo Working Paper Series 4599, CESifo Group Munich.
    7. Larcker, David F. & Ormazabal, Gaizka & Taylor, Daniel J., 2011. "The market reaction to corporate governance regulation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 431-448, August.

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