Does Corporate Governance Impact Equity Volatility? Theory and Worldwide Evidence

61 Pages Posted: 30 Jul 2018 Last revised: 9 Jul 2020

See all articles by Louis Gagnon

Louis Gagnon

Queen's University - Smith School of Business

Alexandre Jeanneret

HEC Montréal

Date Written: July 8, 2020

Abstract

This paper studies the impact of corporate governance on equity volatility. We develop a corporate finance model with endogenous financing policies and manager-shareholder agency conflicts. Stronger corporate governance boosts equity valuation and the optimal level of debt, but the valuation effect reduces equity volatility more than the additional debt increases it. Thus, equity volatility drops with corporate governance improvements, especially for financially constrained firms. We confirm our theoretical predictions with a difference-in- difference specification exploiting the staggered passage of governance reforms on a sample of 33,831 firms from 48 countries over the 1990-2016 period.

Keywords: Equity volatility, corporate governance, financial risk, idiosyncratic risk, international markets

JEL Classification: G12, G32, G34

Suggested Citation

Gagnon, Louis Joseph and Jeanneret, Alexandre, Does Corporate Governance Impact Equity Volatility? Theory and Worldwide Evidence (July 8, 2020). 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

HEC Montréal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

HOME PAGE: http://www.alexandrejeanneret.net

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