How Does Corporate Governance Impact Equity Volatility? Worldwide Evidence and Theory

Abstract

We investigate the causal impact of corporate governance on equity volatility in the context of the quasi-natural experimental setting, exploiting the staggered passage of governance reforms around the world in the past 25 years. Using a sample consisting of 33,831 firms from 48 countries, we find that equity volatility drops by one fifth following the passage of reforms that increase board independence. Our evidence shows that this effect is driven by a change in fixed operating costs as managerial expropriation decreases, rather than by changes in a firm's investments, profitability, asset risk, or financing decisions. We rationalize these findings with an asset pricing model where minority shareholders are subject to sticky managerial expropriation.

Keywords: Equity volatility, agency conflicts, corporate governance, governance reforms, asset pricing.

JEL Classification: G12, G32, G34