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Corporate Governance and Expected Stock Returns: Evidence from Germany

Wolfgang Drobetz

University of Hamburg

Andreas Schillhofer

Greenhill & Co.

Heinz Zimmermann

University of Basel - WWZ - Department of Finance

February 2003

ECGI - Finance Working Paper No. 11/2003

Recent empirical work shows that a better legal environment leads to lower expected rates of return in an international cross-section of countries. This paper investigates whether differences in firm-specific corporate governance also help to explain expected returns in a cross-section of firms within a single jurisdiction. Constructing a corporate governance rating (CGR) for German firms, we document a positive relationship between the CGR and firm value. In addition, there is strong evidence that expected returns are negatively correlated with the CGR, if dividend yields and price-earnings ratios are used as proxies for the cost of capital. Most results are robust for endogeneity, with causation running from corporate governance practices to firm fundamentals. Finally, an investment strategy that bought high-CGR firms and shorted low-CGR firms would have earned abnormal returns of around 12 percent on an annual basis during the sample period. We rationalize the empirical evidence with lower agency costs and/or the removal of certain governance malfunctions for the high-CGR firms.

Number of Pages in PDF File: 51

Keywords: Corporate Governance, principal-agent theory, asset pricing

JEL Classification: G12, G34, G38

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Date posted: February 19, 2003  

Suggested Citation

Drobetz, Wolfgang and Schillhofer, Andreas and Zimmermann, Heinz, Corporate Governance and Expected Stock Returns: Evidence from Germany (February 2003). ECGI - Finance Working Paper No. 11/2003. Available at SSRN: http://ssrn.com/abstract=379102 or http://dx.doi.org/10.2139/ssrn.379102

Contact Information

Wolfgang Drobetz (Contact Author)
University of Hamburg ( email )
Von-Melle-Park 5
Hamburg, 20146
Andreas Schillhofer
Greenhill & Co. ( email )
Main Tower (34 floor)
Neue Mainzer Strasse 52
D-60311 Frankfurt am Main
Heinz Zimmermann
University of Basel - WWZ - Department of Finance ( email )
Peter Merian Weg 6
Basel, 4002
+41 61 267 33 16 (Phone)
+41 61 267 08 98 (Fax)
Feedback to SSRN

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