The Corporate Governance - Performance Puzzle: New Insights
61 Pages Posted: 20 Jan 2017 Last revised: 24 Sep 2018
Date Written: September 1, 2018
This paper presents the "nG (new Governance) Index", an unequal-weighted measure of corporate governance that dynamically captures the heterogeneity of its individual antitakeover components, as an alternative to the equal-weighted G-Index, E-Index, and Gov-Score proposed in the related literature. Our findings show that all antitakeover provisions do not equally influence firms' corporate governance quality, and our proposed nG-Index therefore traces the governance–performance relationship more persistently than an equal-weighted measure does. Further analysis reveals that an nG-Index based zero-investment hedge, going long on a poor governance portfolio and shorting the good governance one, would generate an abnormal return of over 1.33% per month, or about 16% per year. This hedge is completely opposite to the long good governance–short poor governance strategy suggested in prior literature. We posit that this hedge reversal indicates that, in recent years, investors underreact to good governance signals and/or seek compensation for the high riskiness associated with poorly governed firms.
Keywords: corporate governance, antitakeover provisions, defensive tactics, G-Index, E-Index
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation