On the incremental information content of the components of the Globe and Mail Corporate Governance Index

This study seeks to assess the construct validity of the Globe and Mail Corporate Governance Index. A number of recent studies that have examined corporate governance practices in Canada have relied on annual data from this index. We find an important degree of redundancy on the construction of the index. Our results indicate that fewer index components and even fewer questions to compose each component produces similar results, even for firms that are large and cross-listed. The study suggests that a further review of the theoretical justification of the properties of the Globe and Mail Corporate Governance Index is in order to streamline the selection of its components, thereby improving its quality. From the perspective of practitioners and policy makers, an implication of the study is that if a particular application requires the use of governance indexes for firms not on the list, our results justify relying on the use of a smaller set of components, with even fewer questions, to compose an index of comparable quality.