Corporate Governance and Equity Prices

Gompers, Paul A.; Ishii, Joy L.; Metrick, Andrew

doi:10.2139/ssrn.278920

Download This Paper

Open PDF in Browser

Add Paper to My Library

Corporate Governance and Equity Prices

Quarterly Journal of Economics, Vol. 118, No. 1, pp. 107-155, February 2003

67 Pages Posted: 12 Sep 2001

See all articles by Paul A. Gompers

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

There are 3 versions of this paper

Abstract

Shareholder rights vary across firms. Using the incidence of 24 unique governance rules, we construct a "Governance Index" to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. An investment strategy that bought firms in the lowest decile of the index (strongest rights) and sold firms in the highest decile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions.

Keywords: Corporate governance, shareholder rights, investor protection, agency problems, entrenched management, hostile takeovers, poison pills, golden parachutes, greenmail

JEL Classification: G34, G14

Suggested Citation: Suggested Citation

Gompers, Paul A. and Ishii, Joy L. and Metrick, Andrew, Corporate Governance and Equity Prices. Quarterly Journal of Economics, Vol. 118, No. 1, pp. 107-155, February 2003, Available at SSRN: https://ssrn.com/abstract=278920 or http://dx.doi.org/10.2139/ssrn.278920