Thirty Years of Corporate Governance: Firm Valuation & Stock Returns
Abstracthis paper introduces a dataset tracking approximately 1,000 firmsâ€™ G- and E-index scores, as well the individual corporate governance provisions constituting these indexes, over the 1978-1989 period. Combining this data with the 1990-2006 IRRC data, we are able to track firmsâ€™ corporate governance over a thirty year period. Most governance changes occurred during the 1980s (with relative stability thereafter). We find a robustly negative association between the G- and E-Index and Tobinâ€™s Q for the 1978-2006 period, even when using firm fixed effects, and little direct evidence for reverse causation. The negative firm valuation effects of classified boards, poison pills and G-Index generally was significantly greater after the judicial approval of the poison pill in 1985, which can be considered as a largely unanticipated, exogenous shock to corporate governance. Moreover, G-Index changes have a much stronger negative association with firm valuation when a firm is in an industry experiencing â€œhighâ€ levels of M&A activity. Finally, we find a robust positive association between â€œgoodâ€ corporate governance and abnormal returns for the 1978-2006 period. The abnormal returns association with governance was strongest in the beginning of our 1978-2006 time period and generally declining thereafter, consistent with an explanation of these returns based on the market learning the importance of good governance.
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2485.
Date of creation: 04 Jun 2009
Date of revision: 08 Nov 2009
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