This paper extends the classic risk-return tradeoff of asset pricing to a risk-effort tradeoff, by assuming that managerial effort is necessary to generate cash flows. Corporate governance standards influence the manager's return to effort, her exposure to corporate risk, and the dilution of shareholder value. In capital market equilibrium, this tradeoff has implications for the firm's cash flows and stock returns, and this in turn affects the endogenous choice of governance standards. In equilibrium, the stock's β, the firm’s operating performance, and the strictness of its governance standards are all predicted to co-move positively. Various empirical tests with U.S. data using the corporate governance index of Gompers, Ishii, and Metrick (2003) are consistent with our predictions.
Dieser Eintrag ist Teil der Universitätsbibliographie.
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