Corporate Governance Ratings and Corporate Performance: An Analysis of Governance Metrics International (GMI) ratings of US Firms, 2003 to 2008

Abstract

Since 2003, Governance Metrics International (GMI), the corporate governance research and ratings firm, has produced both home market and global ratings for an increasing number of companies worldwide. GMI’s premise, as stated on its website, is that “companies that emphasize corporate governance and transparency will, over time, generate superior returns and economic performance and lower their cost of capital.” This paper is one of the first attempts to empirically evaluate whether GMI’s governance ratings have any economically significant relationship to future corporate performance. The analysis of GMI's US rated companies evaluates whether this additional source of information relating to the governance of corporations has any relevance for investor decision making and, as claimed by GMI, has the potential to increase shareholder welfare? Our results show that the GMI ratings are statistically significantly related to corporate characteristics, prior performance and to future returns. The results of a portfolio simulation analysis from 2003 to 2008 also shows that the lowly rated GMI portfolios achieved much lower realized returns (and sector-relative returns) than higher rated portfolios. These results strongly suggest that the GMI ratings may be of significant relevance/value for investor decision making.

Keywords: Corporate Governance, Governance Ratings, Portfolio Performance

JEL Classification: G30