Stock market returns, corporate governance and capital market equilibrium

Parigi, Bruno M. ; Pelizzon, Loriana ; Thadden, Ernst-Ludwig von

Document Type: Working paper
Year of publication: 2013
The title of a journal, publication series: ECGI Finance Working Paper
Volume: 362
Place of publication: Bruxelles
Publishing house: European Corporate Governance Institute (ECGI)
Edition: Rev. 2014
Publication language: English
Institution: School of Law and Economics > Microeconomics and Finance (von Thadden (2004-)
Subject: 330 Economics
Abstract: This paper analyzes why corporate governance matters for stock returns if the stock market prices the underlying managerial agency problem correctly. Our theory assumes that strict corporate governance prevents managers from diverting cash flows, but reduces incentives for managerial effort. In capital market equilibrium, this trade-off has implications for the firm's earnings, stock returns, and managerial ownership, because governance impacts the firm's risk-return structure. In particular, the strictness of corporate governance is negatively related to earnings and positively to β. Various empirical tests with U.S. data using the governance index of Gompers, Ishii, and Metrick (2003) yield results consistent with these predictions.

Dieser Eintrag ist Teil der Universitätsbibliographie.

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