Market-Based Evidence on the Usefulness of Corporate Governance Ratings
51 Pages Posted: 18 Apr 2012 Last revised: 17 Jun 2015
Date Written: June 16, 2015
This paper investigates the usefulness of commercial corporate governance ratings from a market perspective. For two large European economies, Germany and the UK, we document a positive association of ISS governance ratings with firm value. However, when we decompose the rating into its two components, publicly available governance information, and information added through the rating vendor’s proprietary rating technology, only the former component turns out significant in the firm value regressions. This finding is not moderated by the institutional diversity of our setting, i.e., the German stakeholder-oriented system versus the UK shareholder-oriented system, and leads us to rule out that our findings are driven by measurement error on behalf of the rating agency. Rather, our results suggest that the economic vindication of governance rating agencies may not derive from their expertise in converting public data into aggregated ratings, but, e.g., from comparative advantages in collecting governance data, or from other factors.
Keywords: governance, CG rating technology, information intermediation, Tobin’s Q
JEL Classification: G32, G34, C21, C26
Suggested Citation: Suggested Citation