Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services

Review of Finance, Forthcoming

47 Pages Posted: 16 Oct 2019

See all articles by Paul M. Guest

Paul M. Guest

Kings Business School; University of Cambridge - Centre for Business Research (CBR)

Marco Nerino

King's Business School; University of Cambridge - Centre for Business Research (CBR)

Date Written: August 20, 2019

Abstract

This paper examines empirically the announcement effect of commercial corporate governance ratings on share returns. Rating downgrades by Institutional Shareholder Services (ISS) are associated with negative returns of –1.14% over a 3-day announcement window. The returns are highly correlated with the proprietary analysis of ISS and are decreasing in agency costs, consistent with ratings providing independent information on underlying corporate governance quality. We thus show that the influence and impact of ISS extends beyond proxy recommendations and subsequent voting outcomes. Our findings contrast with the insignificant price impact of Daines, Gow, and Larcker (2010), whose analysis we replicate and successfully reconcile to ours by pooling upgrades and downgrades together.

Keywords: Corporate Governance Ratings; Information Intermediaries; Event Study; Information Content; Institutional Shareholder Services

JEL Classification: G14, G24, G34

Suggested Citation

Guest, Paul M. and Nerino, Marco, Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services (August 20, 2019). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3464395

Paul M. Guest

Kings Business School ( email )

Kings College London
Strand
London, London WC2R 2LS
United Kingdom

University of Cambridge - Centre for Business Research (CBR) ( email )

Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Marco Nerino (Contact Author)

King's Business School ( email )

150 Stamford Street
London, SE1 9NH
United Kingdom
WC2B 4BG (Fax)

University of Cambridge - Centre for Business Research (CBR) ( email )

Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom

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