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Does corporate governance matter for stock returns? Estimating a four-factor asset pricing model including a governance index

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  • Andre Carvalhal
  • Carolina Nobili

Abstract

This paper investigates whether including a corporate governance factor in the Fama and French three-factor model helps explain stock returns. By constructing a broad corporate governance index (CGI) for Brazilian public firms, this paper documents that governance does explain average returns on stocks. Most importantly, the governance factor seems to be more powerful than firm size and book-to-market ratio. We also provide evidence that expected stock returns are negatively related to firm-level corporate governance. An investment strategy that bought low-CGI firms and sold high-CGI firms would have earned abnormal returns of around 10% per year during the sample period.

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  • Andre Carvalhal & Carolina Nobili, 2011. "Does corporate governance matter for stock returns? Estimating a four-factor asset pricing model including a governance index," Quantitative Finance, Taylor & Francis Journals, vol. 11(2), pages 247-259.
    • Handle: RePEc:taf:quantf:v:11:y:2011:i:2:p:247-259
    DOI: 10.1080/14697680903373676
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    2. Roy Kouwenberg & Roelof Salomons & Pipat Thontirawong, 2014. "Corporate governance and stock returns in Asia," Quantitative Finance, Taylor & Francis Journals, vol. 14(6), pages 965-976, June.
    3. Ricardo Pereira Câmara Leal & André L. Carvalhal & Ana Paula Iervolino, 2015. "One Decade of Evolution of Corporate Governance Practices in Brazil," Brazilian Review of Finance, Brazilian Society of Finance, vol. 13(1), pages 134-161.
    4. P. Krishna Prasanna & Anish S. Menon, 2012. "Corporate governance and stock market liquidity in India," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 3(1/2), pages 24-45.
    5. Almeida, José Elias Feres de & Dalmácio, Flávia Zóboli, 2015. "The Effects of Corporate Governance and Product Market Competition on Analysts' Forecasts: Evidence from the Brazilian Capital Market," The International Journal of Accounting, Elsevier, vol. 50(3), pages 316-339.
    6. Raphael Moses Roquete & Ricardo P. C. Leal & Carlos Heitor Campani, 2018. "Corporate governance and fundamental indexation in Brazil," Economics Bulletin, AccessEcon, vol. 38(3), pages 1494-1504.

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