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

70 Pages Posted: 30 Jul 2018 Last revised: 12 Oct 2021

See all articles by Louis Gagnon

Louis Gagnon

Queen's University - Smith School of Business

Alexandre Jeanneret

UNSW Business School

Date Written: October 12, 2021

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

Suggested Citation

Gagnon, Louis Joseph and Jeanneret, Alexandre, How Does Corporate Governance Impact Equity Volatility? Worldwide Evidence and Theory (October 12, 2021). Available at SSRN: https://ssrn.com/abstract=3222818 or http://dx.doi.org/10.2139/ssrn.3222818

Louis Joseph Gagnon (Contact Author)

Queen's University - Smith School of Business ( email )

Kingston, Ontario K7L 3N6
Canada
613-533-6707 (Phone)
613-533-2321 (Fax)

Alexandre Jeanneret

UNSW Business School ( email )

Sydney, NSW 2052
Australia

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