Factoring governance risk into investors´expected rates of return by means of a weighted average governance index
AbstractAlthough global investors have been paying more heed than ever to Corporate Governance for the last decade, the evolving premium risk stemming from variegated governance issues has not been factored yet into the expected return of any investor’s portfolio. From a theoretical standpoint, this paper sets forth firstly a weighted-average index built up by choosing distinctive and relevant governance variables that go beyond provisions usually embedded in the founding charter. Afterwards, a measure of governance risk premium will be derived out of the index rate of change. Lastly, it will be introduced a multiplicative model of expected returns with a risk adjustment factor over the risk-free asset comprising systematic, nonsystematic, country and governance risk premiums.
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Bibliographic InfoPaper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 356.
Length: 245 pages
Date of creation: Sep 2007
Date of revision:
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governance risk; governance index; governance rate; expected return; risk adjustment;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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- Enrique Yacuzzi, 2008. "A governance indicator for small and medium-sized enterprises," CEMA Working Papers: Serie Documentos de Trabajo. 390, Universidad del CEMA.
- Rodolfo Apreda, 2008. "Cost of capital adjusted for governance risk through a multiplicative model of expected returns," CEMA Working Papers: Serie Documentos de Trabajo. 383, Universidad del CEMA.
- Rodolfo Apreda, 2009. "A two-tiered approach to the valuation of investment projects adjusted for governance risk," CEMA Working Papers: Serie Documentos de Trabajo. 392, Universidad del CEMA.
- Rodolfo Apreda, 2011. "GOVERNANCE RISKS. How to measure them by means of the incremental cash-flow model," CEMA Working Papers: Serie Documentos de Trabajo. 467, Universidad del CEMA.
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