Corporate Governance Data and Measures Revisited

59 Pages Posted: 24 Nov 2015

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Peter C. Reiss

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Youfei Xiao

Duke University - Fuqua School of Business

Date Written: November 1, 2015

Abstract

Researchers in accounting, corporate finance, economics, and law regularly evaluate the impact of corporate governance provisions on firm performance and managerial actions. Many of these studies rely on publicly available governance summaries developed by the Investor Responsibility Research Center (IRRC). These summaries have been coded and used in a variety of influential studies, including analyses that assess whether corporate governance practices impact shareholder value.

This paper reexamines the coding of the IRRC summaries for the 1990s and early 2000s. We find that the IRRC coding and one commercial source of corporate governance data disagree significantly for several important governance indicators. Our own review of source documents uncovered measurement errors in the IRRC summaries, especially for golden parachutes and supermajority voting provisions.

We also find that the IRRC’s definitions do not always clearly represent managerial entrenchment or the difficulty of a (hostile) takeover, as many researchers have assumed. To understand whether these issues matter for corporate governance research, we investigate the striking conclusion of prior work that finds that a hedge portfolio composed of a long (short) position in firms with few (many) anti-takeover provisions produces annual excess returns of six to twelve percent per annum from 1990 to 1999.

We find that governance data corrected for errors and definitional concerns do not predict excess returns. We conclude researchers should exercise caution using IRRC data from this period, and that much more attention needs to be devoted to measuring corporate governance practices.

Keywords: corporate governance provisions, antitakeover provisions, impact on shareholder value, Investor Responsibility Research Center (IRRC)

JEL Classification: G30, G32, G34

Suggested Citation

Larcker, David F. and Reiss, Peter C. and Xiao, Youfei, Corporate Governance Data and Measures Revisited (November 1, 2015). Rock Center for Corporate Governance at Stanford University Working Paper No. 211; Stanford University Graduate School of Business Research Paper No. 15-60. Available at SSRN: https://ssrn.com/abstract=2694802 or http://dx.doi.org/10.2139/ssrn.2694802

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Peter C. Reiss

Stanford Graduate School of Business ( email )

Stanford, CA 94305-5015
United States
650-725 2759 (Phone)
650-725-7979 (Fax)

HOME PAGE: http://www.stanford.edu/~preiss

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Youfei Xiao

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-8026 (Phone)

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