Corporate Governance Scores and Long Term Performance
56 Pages Posted: 5 Nov 2012
Date Written: April 1, 2012
In this paper, we investigate a neglected aspect of corporate governance impact on firm performance: the revisions in corporate governance scores. Using a dataset of corporate governance scores from 1999 to 2009 on European firms in a long-term event study analysis, we establish four findings. First, country characteristics play an important role in the explanation of corporate governance scores. Second, high scores of governance are positively and significantly associated with subsequent abnormal returns over medium-term horizons. Third, country characteristics do not play a role in the explanation of revisions in corporate governance scores. Finally, upward revisions in corporate governance scores have a positive and robust association with subsequent abnormal returns in both short-term and medium-term horizons. Thus, the investors’ underreaction to revisions in governance scores could be an effective investment strategy. Long-short strategies based on revisions – buying stocks with upward revisions and selling stocks with downward revisions – yield positive and significant abnormal returns over medium-term horizons. These empirical evidences suggest that investors must consider not only the governance scores but also the scores revisions when building equity portfolios.
Keywords: Corporate governance, equity returns, long-term performance, event study
JEL Classification: G14, G30
Suggested Citation: Suggested Citation