Is Good Governance Priced?

77 Pages Posted: 16 Jan 2018 Last revised: 17 Aug 2019

See all articles by Bruce Allen Hearn

Bruce Allen Hearn

University of Southampton; University of Bradford - School of Management

Kate Phylaktis

City University London - The Business School

Date Written: August 15, 2019


A new governance index is constructed, which forms the basis of a new governance valuation factor, defined as the product of the firm governance index and the country institutional quality. Using monthly returns of 4,714 blue chip firms from 35 OECD equity markets for 17 years, our tests of variants of the augmented-CAPM, show that a two factor CAPM augmented with a factor mimicking portfolio based on our new governance metric yields the highest explanatory power in multi-country samples. In general, our results indicate variations in abnormal returns on portfolios that reflect returns differences between democratic (strong) and dictatorship (weak) governance sorted deciles not explained by existing augmented CAPMs. This confirms the importance of differences in governance and that minority investors should seek a premium to compensate for potential welfare losses and a means of hedging these losses within a conventional asset pricing framework. We argue that this is representative of the revealed preferences of insider controlling groups within firms towards expropriating minority outsiders

Keywords: Governance, Governance indices, GIM, Asset pricing

JEL Classification: G3, G11, G12, G15

Suggested Citation

Hearn, Bruce Allen and Phylaktis, Kate, Is Good Governance Priced? (August 15, 2019). Asian Finance Association (AsianFA) 2018 Conference , Available at SSRN: or

Bruce Allen Hearn (Contact Author)

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

University of Bradford - School of Management ( email )

Emm Lane
Bradford, West Yorkshire Bd9 4JL
United Kingdom

Kate Phylaktis

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 70408735 (Phone)
+44 20 70408881 (Fax)


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