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Corporate Governance and Equity Prices
Paul A. Gompers Harvard Business School; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI) Joy L. Ishii Stanford Graduate School of Business Andrew Metrick Yale School of Management; National Bureau of Economic Research (NBER) Quarterly Journal of Economics, Vol. 118, No. 1, pp. 107-155, February 2003 Abstract: Shareholder rights vary across firms. Using the incidence of 24 unique governance rules, we construct a "Governance Index" to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. An investment strategy that bought firms in the lowest decile of the index (strongest rights) and sold firms in the highest decile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions.
Keywords: Corporate governance, shareholder rights, investor protection, agency problems, entrenched management, hostile takeovers, poison pills, golden parachutes, greenmail JEL Classifications: G34, G14 Working Paper SeriesDate posted: September 12, 2001 ; Last revised: January 22, 2009Suggested CitationContact Information
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