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Corporate governance ratings as a means to reduce asymmetric information

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Can corporate governance ratings reduce problems of asymmetric information between companies and investors? To answer this question, we set out to examine the information basis for providing such ratings by reviewing corporate governance attributes that are required or recommended in laws, accounting standards and codes, respectively. After that, we scrutinize and organize the publicly available information on the methodologies actually used by rating providers. However, important details of these methodologies are treated as confidential property, thus we approach the evaluation of corporate governance ratings as a means to reduce asymmetric information in a more general manner. We propose that the rating process may be seen as consisting of two general activities, namely a data reduction phase, and a data weighting, aggregation and classification phase. Findings based on a Danish data set suggest that rating providers by selecting relevant attributes in an intelligent way can improve the screening of companies according to governance quality. In contrast, it seems questionable that weighting, aggregation and classification of corporate governance attributes considerably improve discrimination according to governance quality

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  • Balling, Morten & Holm, Claus & Poulsen, Thomas, 2006. "Corporate governance ratings as a means to reduce asymmetric information," Financial Reporting Research Group Working Papers R-2005-04, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  • Handle: RePEc:hhb:aarbfr:2005-004
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    File URL: http://www.hha.dk/afl/wp/rep/R_2005_04.pdf
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    1. Stefan Beiner & Wolfgang Drobetz & Markus M. Schmid & Heinz Zimmermann, 2006. "An Integrated Framework of Corporate Governance and Firm Valuation," European Financial Management, European Financial Management Association, vol. 12(2), pages 249-283.
    2. Wolfgang Drobetz & Andreas Schillhofer & Heinz Zimmermann, 2004. "Corporate Governance and Expected Stock Returns: Evidence from Germany," European Financial Management, European Financial Management Association, vol. 10(2), pages 267-293.
    3. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 107-156.
    4. Howard Sherman, 2004. "Corporate Governance Ratings," Corporate Governance: An International Review, Wiley Blackwell, vol. 12(1), pages 5-7, January.
    5. Chi-Kun Ho, 2005. "Corporate Governance and Corporate Competitiveness: an international analysis," Corporate Governance: An International Review, Wiley Blackwell, vol. 13(2), pages 211-253, March.
    6. Yin-Hua Yeh, 2005. "Do Controlling Shareholders Enhance Corporate Value?," Corporate Governance: An International Review, Wiley Blackwell, vol. 13(2), pages 313-325, March.
    7. Heidi Vander Bauwhede & Marleen Willekens, 2008. "Disclosure on Corporate Governance in the European Union," Corporate Governance: An International Review, Wiley Blackwell, vol. 16(2), pages 101-115, March.
    8. Frederic S. Mishkin, 1999. "Global Financial Instability: Framework, Events, Issues," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 3-20, Fall.
    9. Frankel, Richard & Li, Xu, 2004. "Characteristics of a firm's information environment and the information asymmetry between insiders and outsiders," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 229-259, June.
    10. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank.
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