Do Productivity and Governance Matter? Their Impact in Stock Returns in European Industrial Companies

Abstract

We take into consideration an innovative database of observations, focusing its attention on European data of different countries since the beginning of the Euro area. Our study introduces new control variables to the state variables used by Fama and French. This research considers the impact of specific control variables: the Productivity Index and the Corporate Governance Index on the total annual investment return of 1,058 the listed European industrial companies from January 1st 1996 to December 31st 2006. Both indices have a positive and statistically significant impact on stock returns. Dividing our sample into five different portfolios, both according to market capitalization and equal number of companies, we have clear evidence that lower market capitalization companies receive more benefits from a better level of productivity and governance. While higher capitalization companies have got stronger tools, like market power or political relevance in order to influence their performances and, consequently, their stock returns.

Keywords: stock returns, corporate governance, productivity

JEL Classification: G10, G34, J24