How Does Corporate Governance Affect Equity Volatility? Worldwide Evidence and Theory
Forthcoming in The Review of Corporate Finance Studies
76 Pages Posted: 30 Jul 2018 Last revised: 31 Jan 2023
Date Written: January 12, 2023
Abstract
We investigate the causal impact of corporate governance on equity volatility in a quasi- natural experimental setting, exploiting the staggered passage of governance reforms in the past 25 years. Using a sample 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. This effect is driven by an adjustment in fixed operating costs as managerial expropriation decreases, rather than by changes in firms’ investments, profitability, asset risk, or financing decisions. We rationalize these findings with a 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
Suggested Citation: Suggested Citation