Does Corporate Governance Matter for Equity Returns?

Abstract

In this paper we reexamine the findings of Gompers, Ishii, and Metrick (2003) and Bebchuk, Cohen, and Ferrell (2009) and find the link between corporate governance (as measured by the G index and E index) and firm stock returns is much weaker than previously suggested. We extend the sample period and find a reversal of the relationship between governance and stock returns documented in these works over the 1990s and early 2000s. We further explore the source of the observed superior performance of good governance firms during the 1990s and find this relationship is partially driven by large firms and the Nasdaq bubble. We conclude corporate governance is less important for firm stock returns than suggested by previous literature.

Keywords: corporate governance, stock returns, Nasdaq bubble

JEL Classification: G30, G34, K22