Governance Risk and the Cross-Section of Stock Returns

61 Pages Posted: 26 Aug 2019 Last revised: 23 Aug 2021

See all articles by Adelphe Ekponon

Adelphe Ekponon

University of Liverpool Management School

Date Written: August 21, 2019


This paper modelizes and provides asset pricing implications of corporate governance policies. Agency costs, proxied by commonly used corporate governance indices, arise because insiders are self-interested and vary across firms. First, firms differ in their agency costs’ level during initial financing, and higher initial costs translate into lower average equity premium because insiders select a lower (sticky) leverage ratio. Second, they vary along with their difference in agency costs in bad versus good times. In bad times, firms with higher agency costs also have higher returns because it amplifies their stock price volatility at the business cycle frequency.

Keywords: Corporate governance, Asset pricing, Business cycles, Agency conflicts

JEL Classification: G30, G12, G32, G14

Suggested Citation

Ekponon, Adelphe, Governance Risk and the Cross-Section of Stock Returns (August 21, 2019). Available at SSRN: or

Adelphe Ekponon (Contact Author)

University of Liverpool Management School ( email )


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