Stock Market Returns, Corporate Governance and Capital Market Equilibrium

40 Pages Posted: 6 Dec 2013

See all articles by Bruno Maria Parigi

Bruno Maria Parigi

University of Padova - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice

Ernst-Ludwig von Thadden

Universitaet Mannheim; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: November 29, 2013

Abstract

This paper proposes a theoretical model that incorporates corporate governance into the basic CAPM, where corporate governance affects the disutility of managerial effort and the possibility of managers to divert company resources. It shows that corporate governance affects firms’ stock returns and also how the quality of corporate governance is chosen endogenously. The model predicts that in equilibrium the quality of corporate governance correlates positively with β and idiosyncratic volatility and negatively with returns on assets. Various tests with U.S. firm data using the corporate governance index of Gompers, Ishii, and Metrick (2003) confirm these predictions.

Keywords: corporate governance, CAPM, variability of returns

JEL Classification: G320, G380, K220

Suggested Citation

Parigi, Bruno Maria and Pelizzon, Loriana and von Thadden, Ernst-Ludwig, Stock Market Returns, Corporate Governance and Capital Market Equilibrium (November 29, 2013). CESifo Working Paper Series No. 4496, Available at SSRN: https://ssrn.com/abstract=2363915

Bruno Maria Parigi (Contact Author)

University of Padova - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Ernst-Ludwig Von Thadden

Universitaet Mannheim ( email )

Department of Economics
Mannheim, 68131
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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